Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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..... 54 Figure 29: Calgary ..............................Regular Unleaded .......... 25 Figure 7: Outlet Representation by Mode....................................................... 36 Figure 17: Study Market Methodology ....... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category..................................................................................Price History .... Income................................... 40 Figure 18: 1995 Average "Blended" Pump Price ........................................................................................................................................... 30 Figure 10: CPI Index Comparison ...Price History .........Selected Goods & Services ............Price History.............. Costs................................. 44 Figure 21: Gross Marketing Margin Elements ..........Regional & Urban Groupings.............................................. 58 Figure 32: Toronto .........8¢ Pump Price) ........... 43 Figure 20: Ex-Tax Pump Price Elements ........ 49 Figure 26: Outlet Revenues......................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ...................................................................................................................... 45 Figure 22: Petroleum Gross Product Margins ............................Price History ......Price History ..................................................... 71 MJ ERVIN & ASSOCIATES i .......... 4 Figure 2: 1996 Average Prices/Margins ....................... 66 Figure 35: Saint John NB ........................................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ............................................................................................................................... Pump Price (nominal ¢/litre)....................................................1988-1995 ............................................................tax................................................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ........................................................................................................................ 35 Figure 16: Monthly Demand vs......................................................... 62 Figure 33: Ottawa .......................................... 70 Figure 37: Charlottetown .............................................................. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $).......................Price History........................................................... 46 Figure 23: Average Annual Throughput per Outlet................................................................ 57 Figure 31: Winnipeg ..................................Selected Centres .........................................................Price History .................Price History ....................................................................... 48 Figure 25: Outlet / Volume Relationship ............... 50 Figure 27: Victoria ................................................. 28 Figure 8: Outlet Representation by Service ...... 33 Figure 13: Monthly Gross Marketing Margins..........................................Price History........ 24 Figure 6: 1995 Retail Outlets by Province ....................... 63 Figure 34: Montreal ............................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ......................................................................................................... Gross Product Margin .... ex-tax elements .........Price History.............. 56 Figure 30: Regina ........................................................................................... 42 Figure 19: Pump Price ............................. 53 Figure 28: Vancouver ...........................List of Figures Figure 1: Pump Price / Margin Model................................................................. 24 Figure 5: Canadian Retail Outlet Population ................... 47 Figure 24: Outlet Volume vs...... 16 Figure 3: 1996 Average Regular Gasoline Margins (56.........................................................................Price History.............................................. 69 Figure 36: Halifax ...................................................................

............ 15 Table 3: Selected Study Markets ..................................... 51 MJ ERVIN & ASSOCIATES ii ............................................................................List of Tables Table 1: Downstream Sales Channels ............................... 13 Table 2: Taxes on Regular Gasoline on December 31. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue............................... 1996 ...............................................................................

dealer income. This study.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.8 ¢ TAX 28. together with a separate review of the refining sector. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.5 cents per litre on the sale of regular gasoline in a typical major urban market. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. Price competition occurs at three distinct levels in this industry.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. These prices are determined in a competitive marketplace. 1996 Average Prices and Margins . the Canadian retail marketing sector realized an average gross product margin of 3. rack.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.1 ¢ 5. represented by crude.4 ¢ 19. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.5 ¢ 0. each with unique MJ ERVIN & ASSOCIATES iii . Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and the Canadian Petroleum Products Institute (CPPI).3 ¢ 28. and ex-tax pump prices.2 ¢ 24. Natural Resources Canada (NRCan). forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. supplier costs and profitability. and a foundation for effective policy development.

From 1986 to 1995.500 retail outlets were in operation in Canada in 1995. and the traditional automotive service bay. Approximately 16. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). well over half of all outlets in Canada operate as lessees or independents. are examples of ways in which outlet petroleum sales are augmented by other revenues. this study focuses on the retail gasoline sector. demand and other competitive factors existing at the time. Convenience store. which potentially allow for reduced margins at the gasoline pump. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. The resultant margins are therefore a reflection of the state of product supply. car wash. Dealers have a variety of relationships with their supplier. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. due to its prominence in the public and media domain. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. and declined by 10 cents per litre measured in constant dollars. compared to about 22. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. and accordingly. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet.000 in 1989. nine of the past ten years. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. While each of these marketing channels operates in a competitive environment.dynamics.

as a consequence of refinery plant rationalization (closures) and a modest demand increase. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. As a result of these trends. and has been a result of several factors including: • • • improved refinery utilization and efficiency. From 1991 to 1996.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991.The “tax-included” nominal pump price increased over this same period. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. MJ ERVIN & ASSOCIATES v . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. This has both resulted in. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.crude) 5¢ Marketing Margin (retail . improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. however. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.

US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. When petroleum gross product margins were compared to their corresponding outlet throughputs. to derive 1995 average petroleum gross product margins for each of the 19 markets. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. rural markets. but also had significantly higher throughputs per outlet. 19 markets representing a broad range of conditions. This was integrated with selected NRCan price data. although this study provides an independent confirmation of this. were selected for a detailed review of outlet economics. With few exceptions. several “outside variables” (product taxes. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. and one by one. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. wholesale product cost and freight charges) were isolated from the pump price. MJ ERVIN & ASSOCIATES vi . With the participation of several CPPI member companies. That such a relationship should exist was not surprising. A wide range of petroleum gross product margins were evident. This provided for market-bymarket and regional comparisons of key competitiveness indicators.Comparison of Canada.

000.6634Ln(x) + 76. These costs would include salaries of marketing representatives and management.000.000.000 2. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . which reflects his investment in the outlet. smaller markets.000 5. and in major vs. etc. and his personal labour investment.962 R2 = 0. head office and regional office overheads. an additional goal of this study was to undertake a comparison of outlet profitabilities.000 Volume (litres) 4. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000 3. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. sales processing. and/or distributed to shareholders.000 6.000.. the residual revenue is available as profit to be re-invested into retail operations.• Smaller markets performed as competitively as larger centres. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. Consequently.6624 1. This study showed that an average outlet net revenue in the 19-market study group was about $70. corporate charity. revenues from ancillary operations (eg: convenience store. supplier profit: after the above costs are allocated.000.000.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. brand advertising. not poor competition. of which gross product margin and throughput are only two of several factors. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.

but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000 $250. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.$154.000 per year. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. suppliers likely incurred a net loss on outlet operations in 1995.000) $(150. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. were insufficient to cover outlet costs.market study group.000) $(250.000 vs. distant outlets are clearly higher than those associated with concentrated urban markets. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. at 1995 prices. 1.000) $(100. Although an objective measure of competitiveness is elusive.000) $(200. respectively. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000) $(300. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. by all objective measures available to this study.000 $150. The Canadian retail petroleum products industry. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000) $(350.000 $100. and that petroleum sales revenues alone. after allowing for estimated dealer profit and supplier overhead. for which this study had no specific data. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. $61.000 $50. Despite this difference.000 $200.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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When plotted against the margin-volume model. Also. When these margins were compared to their corresponding outlet throughputs. these findings clearly show that pump price increases are ultimately linked not to increased profits. Also. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. not excessive profits. and the associated industry initiatives which are ongoing in nature. most markets. A wide range of petroleum gross product margins were evident within the 19market study group. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Outlet throughput is a key determinant of inter-market pump price differences. Thus. Thus. if Canadian average pump prices were only one cent higher than they were in 1995. 8. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. crude costs. That such a relationship should exist was not surprising. Both the downward trend in margins. 7. Industry profitability is extremely sensitive to very small changes in pump price. and in turn. Indeed. assuming all other costs were unchanged. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. this industry sector would have realized profits of unprecedented proportions. Nevertheless. although pump prices in some markets can fluctuate by several cents per litre in the course of a week.• • • improving production efficiency through refinery plant rationalizations (closures). in the long term these fluctuations are likely more reflective of market restorations. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . had petroleum margins which were commensurate with average outlet throughput for that market. virtually all of the 19 study markets exhibited similar levels of competition. although this study provides comprehensive evidence of this. regardless of size. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. While these economics might appear to place this industry in a position of poor viability. serve as perhaps the most significant indicators of competitiveness in the downstream industry. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Thus. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). but to increases in underlying rack prices. based upon an assumed posted rack price. despite the predisposition of many observers to use them as such.

average pump prices were relatively high. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. and this study showed that gasoline prices were no exception. it would seem that if local government in smaller markets were interested in lowering pump prices. While competitiveness in most smaller markets was shown to be as active as in larger centres. which should. In suggesting this approach however.product margins than larger markets. isolated markets face particular challenges: although found to be highly competitive. there are three points to consider: • • In very small markets. The loss of employment represented by a station closure may be of some concern to smaller communities. other factors exist which contribute to relatively high margins and prices. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. thereby improving petroleum volumes and ancillary revenues at the remaining sites. more isolated markets are generally higher than in larger centres. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. • • At first glance. according to the margin-volume model. The costs of most consumer goods in smaller. Smaller. poor outlet throughputs were generally the predominant factor. MJ ERVIN & ASSOCIATES xiii . reducing the number of outlets may also reduce the number of competitors.5 million fewer litres of gasoline than a group A (major centre) station. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This created some economic pressure to sell product at a higher pump price. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reduce pump prices. in order to build upon the findings in this study towards a full understanding of the dynamics at work. A full-serve retail gasoline outlet typically employs 3-5 staff. which could actually inhibit competition. the solution would be to encourage some dealers to exit the market. 9.

Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. and the traditional automotive service bay. The historical record is clear however: since deregulating pump prices. possibly to the detriment of the consumer. Also. The federal Competition Bureau for example. that where a healthy competitive climate exists. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Charlottetown. the degree of price competition in the retail petroleum has in effect. direct regulatory interventions may have an adverse effect on competitiveness. does not appear to benefit in consumer terms. and as such. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. is well beyond the scope of this study.10. This competition then. This study proposes rather. Convenience store. MJ ERVIN & ASSOCIATES xiv . A full analysis of the various features of the Nova Scotia and PEI regulatory structures. are an acceptable limitation on pure competition (Finding 8). 11. as marketers find even more innovative ways to attract market share. under the current PEI regulatory structure. and likely others in Nova Scotia. characterized by narrow product margins and relatively flat pump prices. As these findings show. is viewed as an agency which exists to the benefit of industry and consumer alike. Retail ancillary operations are a critical element of petroleum price competition. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. many national and local environmental regulations exist for good cause. as it does in the Canadian petroleum marketing sector. is both the cause and consequence of increased activity in ancillary operations. sometimes below that of outlet operating costs. and the perceived effect on their markets. car wash. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). has seen a decline in pump prices relative to other Canadian markets. depressed petroleum revenues. the Halifax market. and in turn. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. will likely preserve a highly competitive petroleum market.

not inhibit. along the lines of the model used in this study. Improve public understanding and awareness of competition in the petroleum marketing sector. and the nature of competitiveness influences. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. This should be in the form of a quarterly summary of price trends and related measurements. 2. in a simple format designed for consumers and legislators. using Canadian and foreign selected markets. Develop cooperative industry research into marketing sector competitiveness issues. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.1. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. A regular comprehensive competitiveness evaluation. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. using Canadian and foreign selected markets. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. and the converse image held in much of the public domain. • • MJ ERVIN & ASSOCIATES xv . A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. margins and competitiveness factors. petroleum marketing competitiveness. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Public perception measurement.

consumers. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. • * * * Better understanding of this industry. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and regulators alike. using Canadian and foreign selected markets. and in particular. MJ ERVIN & ASSOCIATES xvi . by industry. and issues/opportunities facing such markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.

The SCF laid the foundation for supplementary studies.... The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.. and that issues and challenges be identified so that conclusions and recommendations can be made “. region by region across Canada. and . more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. which comprise the “downstream” oil industry..to analyze the rack to retail market and the market structure for refined petroleum products. face a number of challenges: a poor public image..to draw comparisons with nearby USA markets. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. Project Objectives The working group established as the primary objective of this study “.to better understand the competitive opportunities and challenges. . including a regional.to provide a sound database upon which more effective policy decisions can be made. to name a few. leading to more effective policies and reduced uncertainty for future investment. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. and regional differences which face the petroleum products retail industry.. Specific purposes of this study would be: • • • • “. and in the process. A working group represented by Natural Resources Canada (NRCan). competitive pressures from US and offshore refiners.. the Canadian Petroleum Products Institute (CPPI).” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.to help the industry cope and to enhance competitiveness.” MJ ERVIN & ASSOCIATES 1 . or even communities within the same region.. or petroleum marketing portion of the study. and in comparison to the Canadian national average and nearby USA markets”. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. .. In 1995.to determine the key factors which drive competitiveness in specific markets.Introduction Background Canada’s petroleum refining and marketing sectors. and MJ Ervin & Associates was selected to undertake the “rack to retail”. and a challenging array of potential environmental initiatives. and Industry Canada was convened to undertake this project..

an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. or which have a specific meaning in the context of this report. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. from which some important findings are made. margins and demand patterns over the past several years. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Specific comparisons of specific Canadian and US consumer markets were not made. • Part E: Conclusions and Recommendations summarizes the study findings and. It also relates consumer demand patterns to pump price fluctuations. Many of the findings in this report are presented in graphical form. The study does provide comparisons with US markets on a national level of detail. Part C: Historical Trend Analysis provides an overview of prices. Ultimately. undertaken as part of this project to: • make a more detailed examination of price. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Supporting data to these charts can be found in Appendix II. and a foundation for effective policy development. Findings are stated in bold and are summarized in part E of this report. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . and the effect of competitiveness on each subsector. in Appendix I. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. it provides a comprehensive tool to understand the dynamics of this vital and complex industry.The study meets these objectives. due to the considerable data gathering difficulties that such an approach would entail. and in order to provide insights into the range of competitive dynamics that can exist. presents conclusions and recommendations which arise from the study findings. Part D: Selected Market Study presents the findings of a diverse 19-market study. Unless otherwise stated. through a multi-faceted approach.

Ministère des ressources naturelles du Québec. Imperial Oil Ltd. These included: Canadian Tire Petroleum. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. including Ultramar Canada. Shell Canada. Petro-Canada.• Industry Canada. for their assistance. and Shell Canada. facilitated some of the data gathering needs of this study. and provided critical guidance and feedback at several key stages in the process. chaired the steering committee.. The Canadian Petroleum Products Institute. Suncor Inc. Ontario Ministry of Environment and Energy. • • Several organizations participated in two key review sessions. and Industry Canada.. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Petro-Canada. Finally. We gratefully acknowledge these companies. Natural Resources Canada. through Bob Clapp. NRCan.. and their 481 retail associates whose outlet data was used in our analysis. Environment Canada. CPPI. Suncor Inc. assisted in securing the support and participation of member companies in the selected markets phase of the study. Consumers Association of Canada. and also participated in the steering committee.. through Maureen Monaghan and Huguette Montcalm. MJ ERVIN & ASSOCIATES 3 .

An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . Yet. but simply. principally of motor gasoline. In fact.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. as they are in Figure 1. These relationships can be modeled. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. texture. or taste. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.price . To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. unlike many consumer products. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. its price. as this study shows. multifaceted industry. most Canadians relate to this industry in one specific way: as consumers. and serves to explain several factors that together determine retail gasoline prices at any given time. It is this particular feature of petroleum products . the particular quality of gasoline which is of most interest to consumers is not its colour.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. And. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector.

1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. From an industry perspective. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. A consumer however. is more likely to equate the term with “value for money”. Ultimately however.or margin . Each margin is quantified by its defining prices. an understanding of the term itself is necessary. MJ ERVIN & ASSOCIATES 5 . and in fact inextricably related. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. it is important to define the term “margin”. objective measurement for competitiveness. While both perspectives are valid. So defined. this study examines competitiveness from the latter. While this term is often associated with the phrase “profit margin”. evaluating competitiveness is therefore a partly subjective process. each essentially taking a share1 .from the total pump revenue.Many of the terms introduced and explained in this section are used extensively throughout this study. gross margin represents revenue only. Gross margin is simply the difference between two price points. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. (implying that the stated margin represents net income or “profit”). “competitive” may be synonymous with “viable”. these stakeholder revenues are derived from the revenue from the retail sale. Before examining each of the model elements. margins are squeezed or expanded accordingly. this study’s use of the term relates to gross margin. any operating expenses must then be considered before making any determination of profits. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. consumer perspective.

in order to maintain some level of brand variety. Technological change and innovation are the large levers of competition in industry. or in other words.Unlike many business or economic concepts. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Inevitably. if market conditions allow a sufficient number of players to remain profitably engaged. Accordingly. Conditions for a competitive market can be deemed to exist when: • • more than one. More importantly. this usually requires a reasonable number of competitors. Price competition. and the entry of new competitors and new ideas. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. one must ask how marketers compete. Since a competitive market effectively limits the price option. provide some means for comparing the type and to some extent. as competitors seek to attract market share through lower prices. and unless care is taken to use the word precisely. represents a process by which prices are set. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors.” Price Competition in the Oil Industry In order to assess competitiveness.” “. Competition can only be sustained therefore. 1986: “Competition may mean very different things to different people. Simply put. is the only real option in the long term. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. The actions by business rivals place an upper limit on the prices a firm can charge for its products. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. the degree of competition within a market.. To achieve this. competitors can either restore higher prices or reduce costs. it can frustrate communication and obscure analysis. and ideally many entities offer the same or similar products (brand variety). improving efficiencies. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). in the sense in which it is something in the public interest.. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . the result of price competition is reduced profit. reducing costs. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. a universally acceptable definition of competitiveness is elusive. An effective functioning of markets also permits smaller competitors to expand if they meet the test.

the geographic scale of competition is an important consideration. 4th Ed. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. p. It is also important to stress that the market ultimately sets rack and retail pump prices. MJ ERVIN & ASSOCIATES 7 . Basic Marketing: A Managerial Approach. in rack markets. competition in the crude and rack markets deserves some mention. so a brief description of these. Price. The dynamics of upstream and refiner competition are major studies in themselves. particularly in the crude (upstream) industry and refiner sector. and are generally known as integrated oil companies. most Canadians relate more in terms of retail gasoline marketing. Ill. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. Nevertheless. 1971). whose main activity is the exploration and development of crude oil. which in turn defines the margins. whose main 1 E. Jerome McCarthy. which in turn defines a proper market price. (Homewood. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. New York. Given the commodity nature of petroleum products. Irving. and are beyond the scope of this study. is false. and as will become more evident in this study. or four P’s: Product. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. the most effective of these as a competitive tool is price. 1960) 2 Although distinct. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. • Thus described. and Promotion. commonly known as the “marketing mix”1. Within the broad context of the oil industry. A refiner in Toronto may well compete with a refiner in Buffalo. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale.. The converse notion that the industry establishes a “should be” margin.the variables at their disposal. In fact. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. the raw material from which gasoline is made. some organizations have operations in two or more of these markets. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. the “oil industry” consists of two distinct industries: the upstream industry.: Richard D.44 (1st Dec. and in retail markets. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. Place. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. and the downstream industry.

production. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. due to variables such as crude quality. Infrastructure The upstream oil industry encompasses a broad range of operations. gasoline grade. which finds and produces crude oil . Canadian producers are known as “price takers” rather than “price setters” of crude prices. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. our crude prices rise and fall according to price benchmarks established far beyond our own shores. drilling. In providing historical comparisons of crude to rack/pump prices. The upstream industry’s crude price is represented in Figure 1 as elastic. that is to say. which it does on a continuous basis. and in the open market structure that exists in Canada. which gives an accurate portrayal of month-to-month crude price fluctuations. implying that it fluctuates. and the delivery and sale of these products to the consumer. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption.activity is the refining of crude oil into petroleum products. alongside major producing countries such as Saudi Arabia. While this study focuses on the downstream industry (and in particular. from the exploration for potential crude or gas reserves. and refinery production methods. its marketing operations). Although this industry is not the focus of this study. in several commodities trading centres around the world. consequently. Crude oil is a commodity which is traded in a global marketplace. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. and transportation of crude oil to the refinery plant. Canadian producers must compete to sell their production to refiners. rather than a fixed value. it is important to examine its relationship with its neighboring downstream industry.the raw material from which gasoline is made. it is probably sufficient to say that. MJ ERVIN & ASSOCIATES 8 . as a minor contributor to the world crude supply. Canadian producers have virtually no influence over world crude prices. Within the scope of this study.

in the petroleum sector. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. and from this feedstock. As is typical of many manufacturing organizations. diesel.1 cents per litre. oil producers must explore for potential reserves. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. heating fuels. and hopefully realize some production. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners.While some suggest that the price of gasoline should rise and fall exactly with the crude price. A modern refinery is a sophisticated work of engineering. personnel. The focus of this study is on the marketing sector of the downstream petroleum industry. maintenance. This sector acquires crude oil. crude is only one of several factors that influence pump prices. and lubricants. buy refined products from the refiner and sell them to the end-use customer. was 19. In addition. MJ ERVIN & ASSOCIATES 9 . manufactures a range of refined petroleum products including gasolines. and numerous safety and environmental safeguards. As a general measure: Finding 2: 1996 average crude price. involving energy. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. is the provincial government. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. which in oil producing provinces such as Alberta. and marketers who. and some attention to the refiner sector is therefore given here. who manufacture petroleum products from crude oil. put simply. drill for. or roughly 34 percent of the pump price. its predominant feature is the plant facility which. and pay out royalties to the resource owner. From this revenue. day-to-day plant operations are cost-intensive. is called the refinery. as a factor of the regular gasoline retail pump price.

this model only uses the benchmark crude value.the price charged for immediate supply on an “as available” basis. If for example. the gross refiner margin is elastic. contract price . and a return on the considerable capital investment in the plant facility. reflecting the cost of transporting the crude from the producing region to the refinery plant. In simple terms. Although contract and transfer prices are distinct from rack price. which may cause Gross Refiner Margin to be slightly overstated. the relative competitive strength of any given rack market is difficult to assess. not the refiner sector. only rack price information is readily available in the public domain. Wholesale volume data is not readily available on a market-specific basis. less the price at which it bought its raw material2 (rack price minus crude price). transfer price . some clear competitiveness indicators exist. which can be broadly categorized as follows1: • • • rack price . In fact the refiner typically pays a higher price than the benchmark crude price.this is the “internal” price charged by a refiner to the marketing arm of the same company. many of which do not have integral refineries. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. external measurement of the current market value of a particular petroleum product. representing major Canadian population centres. but with no material effect upon the Gross Product Margin derivation. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. which provides an independent and objective determination of rack-based gross refiner margin.Price/Margin Model Elements For simplicity. and accordingly. On a national basis however.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. confidential terms between the seller and specific buyers. they use rack price as their basis. For simplicity. Contract and transfer prices are not openly shared. Of these three refiner prices. This margin provides for plant operating costs as described above. In fact. since the market-driven rack price provides an objective. Since both crude and rack prices fluctuate according to market forces. While refineries are always rack price points. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. indicative of a competitive wholesale rack market. For a competitive rack market to exist. refiners sell their product under a variety of arrangements. being squeezed or expanded between these two price points. there would be little or no market-driven competitiveness in the refiner sector. as they relate to negotiated. 1 Dealer Price is not included here. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. as this price point exists within the marketing sector. The existence of rack price in a given market is not of itself. 2 MJ ERVIN & ASSOCIATES 10 . the gross refiner margin is the price at which the refiner sells its refined product.

In practical terms. market-driven rack prices. market-driven Rack (wholesale) pricing of petroleum products. but with their US and European counterparts. arises. or transfer price. as there is no obvious market mechanism to regulate its setting. In practice. for example. or close to. In examining the structure of the Canadian refiner sector. integrated refiner-marketers establish transfer prices at. to major industrial consumers.for example. petrochemical producers. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. to so-called “independent” petroleum marketers. the question of the internal selling price.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . Integrated Refiner-Marketers In Canada. but at the expense of marketing income. and which supply petroleum to about one-third of all retail outlets in Canada1.000 km) for overland truck transport. due to the relatively small transportation cost. MJ ERVIN & ASSOCIATES 11 . There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. In these cases of so-called “integrated” refiner-marketers. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). and in the case of gasoline. from any one of several regional refiners. this limits a marketer to a relatively short range (perhaps 1. in order to maintain realistic accountabilities within each of the two sub-sectors. many US and European refineries are in practice. would produce better than expected refiner income. even overseas. potential sources of wholesale product supply for most Canadian non-refiner marketers. who compete for a share of this demand. but where pipeline or marine fuel terminal facilities exist. wholesale refined product is bought and sold across very large distances. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. most refiners also participate in the marketing and retailing of petroleum products. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. The mechanisms that drive rack prices are more fully discussed on page 36. 1 Based on Octane Magazine Retail Outlet Survey data. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. Canadian refiners must therefore be price competitive not only with each other. who themselves do not refine petroleum products. As shown in Figure 15 (page 35).

gasoline price and competitiveness issues attract considerable public. farming. For this reason.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. including mining. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. home heating. Wholesale Sales to a wide variety of customers. • • MJ ERVIN & ASSOCIATES 12 . Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. and aviation. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. which “sets” the retail price of gasoline. in the minds of many consumers. each with its own distinct infrastructure. Retail Sales to the domestic motorist. It is this sector which has direct contact with the petroleum consumer and it is this sector. media and regulatory attention. or in the case of cardlock facilities. principally into commercial trucking operators’ vehicles. as a popular and relevant “window” on the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. and purchase at or near the established rack price. product is sold from a central facility. and who essentially deal directly with the refiner. Marketing operations within this sector can be broadly classified into three elements. Within this industry sector. trucking. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. the most recognized element of the downstream oil industry.

to the aviation fuel consumer. There are over 850 cardlock outlets in Canada. Sales to major industrial accounts. In major centres dedicated Home Heat centres provide this service. Before examining this sector in detail. which is generally less than the rack price. There are over 1. which primarily serve long-disttance truckers and commercial delivery and haulage operators. in smaller centres. and regular gasoline in particular. to the motorist consumer. at a negotiated contract price. typically at the “rack point”.500 retail gasoline outlets in Canada. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. as principal elements of petroleum marketing operations. heating fuel delivery is an integral part of a bulk sales outlet. by delivery tank truck. using delivery tank trucks. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Sales to non-refiner petroleum marketers. such as product transport and/or storage. often delivered by pipeline or ship/barge. according to the contractual relationship between the supplier and the dealer. Sales of aviation fuels at major and secondary airports across Canada. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Retail outlets are operated in a variety of modes. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. as discussed. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales to commercial and industrial accounts by the wholesale marketing sector. Direct sales generally do not involve any marketing sector infrastructure. one final element of the pump price model must be reviewed. Sales to spot buyers at posted rack price. usually involving some aspect of the marketing sector infrastructure. for example. Sales of petroleum products through bulk sales outlets. Sales of home heating fuels to residential furnace oil customers. MJ ERVIN & ASSOCIATES 13 . There are about 16. and usually supply customers by delivery to the customer’s own storage tank. These outlets usually have considerable inventory capacity.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts.300 bulk sales outlets in Canada.

or roughly 50 per cent of the pump price. tax content does fluctuate somewhat with pump price changes. regardless of market conditions. for example. MJ ERVIN & ASSOCIATES 14 . in a small number of markets. Table 2 shows the provincial tax content for retail gasoline.6 cents per litre (Canada 1996 10-city average).3 in Quebec) drop in the tax content. As part C of this study shows. provincial sales tax. would include a roughly 0. typically made up of: • • • • a ten cent per litre federal excise tax. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. the tax content of retail gasoline in Canada has increased steadily over several years. The petroleum industry acts as a collector of these taxes. and seven percent GST. PST). 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. 1 Due to the application of GST (and in Quebec. A three-cent drop in pump price. the tax content of the petroleum price is essentially a pre-determined.2 cent (0. stable amount.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. If the pump price decreases for example. which amount to 28. municipal taxes.

0 4. All Quebec gasoline sales are subject to a 15.0 10.0 10.0 3.0 28.7 30.0 28.7 13.6 3. An additional pump tax of 1.3 Federal Excise Tax 10.0 16.0 14.0 10.5 12.6 3.2 cent per litre pump tax.2 24.8 4.5% sales tax applied to the GST-inclusive pump price.0 10.0 10.0 10. MJ ERVIN & ASSOCIATES 15 .6 3.3 20.0 27.0 10.2 24. Provincial Tax 11.0 10.1 32.3 10.0 10.0 11. plus a 6. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.5 cents and 4.5 14.Table 2: Taxes on Regular Gasoline on December 31. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 GST content (7% of pump) 3.9 3.0 10.8 note 1 note 2 An additional tax of 1.1 25.6 3.0 3.2 10.5 Total Tax 24.0 10.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.4 3.6 22.5 3.7 3.3 27.7 18.5 6.6 25.5 cents was introduced in the Montreal and surrounding area in 1996.0 15.0 9.

5 ¢ 0.1 ¢ 5. was available for product marketing operations.2 ¢ 24. This 1 Prices and margins reflect a Canadian 10 city average.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.3 cents per litre. or 9 percent.5 cents per litre (after freight cost). It also provides an overview of the industry in terms of several infrastructure parameters. based on regular unleaded gasoline. and the retail gasoline sub-sector in particular.3 ¢ 28. and potentially. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). this section provides a view of the Canadian petroleum marketing sector. or 34 percent of the pump price. to derive a representative value for regular gasoline gross product margin in Canada. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. including retail outlet distribution.6 cents per litre.8 ¢ TAX 28.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. operating modes. 3.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.3 percent of the average regular gasoline posted pump price. Figure 2: 1996 Average Prices/Margins . some profit return for the shareholder. Upstream operations realized 19. and ancillary operations. or 50.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. the brand supplier’s costs. namely the dealer’s costs and income. MJ ERVIN & ASSOCIATES 16 . The residual.1 cents per litre. Refiner operations realized 5.4 ¢ 19.

it falls into the domain of the marketing sector. The marketing sector then. Freight cost does not typically fluctuate.5 cents per litre. The gross marketing margin. is the second of two elements of the downstream oil industry. was 5. Freight MJ ERVIN & ASSOCIATES 17 . this is seen as a “non-core” business. See page 10 for further explanation. and is often out-sourced to third-party common carriers. petroleum taxes accounted for 50.3 cents per litre. Bloomberg rack price values were used as the assumed wholesale price. was 3. the finished product (gasoline. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. three key findings can be stated: Finding 4: Finding 5: In 1996. or “rack to retail” margin. In referring to marketing margins and product margins. is usually the gas station. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. for example) is sold/transferred at the current rack or transfer price. In 1996. and it is depicted in Figure 1 as a fixed cost element. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. Both refiner and marketing margins have been in decline over the past several years. and rack price. Based on the 1996 data. In 1996.3 percent of the average urban price of regular gasoline in Canada. as part C will describe.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. Although many petroleum marketers conduct their own freight operations. As the product leaves the refinery plant. and is then transported to the retail outlet. is defined by the marketdriven price points of ex-tax pump price. which in the case of retail gasoline. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market.

6¢ Refiner Operations 5. As represented in Figure 3. petroleum marketers. together with gas station dealers. This is a particularly useful measurement in comparing retail gasoline markets. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .000 per outlet. Gross product margin is therefore defined as gross marketing margin less freight cost. as it represents 80% of all retail gasoline sales. which are typically close to a wholesale rack point.8¢ Pump Price) Upstream Operations 19.costs are generally less than one-half cent per litre in most major Canadian cities.5 cents per litre in 1996. as it excludes the “outside variables” of tax. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). • Product sales: Within this domain. and upstream/refiner margins.3¢ 3.5¢ Product Operations Freight 0.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. typical of any retail business. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. Posted pump price includes all of these variables.1¢ Tax 28. Unlike most other retail enterprises however. and is therefore a poor comparative tool. Figure 3: 1996 Average Regular Gasoline Margins (56. but at an average cost of over $200. rural markets experience higher pump prices than do larger centres. an average gross product margin for regular gasoline in a major Canadian city was 3. storing and dispensing a product such as gasoline adds considerably to the operating cost. incur a variety of costs. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. freight.

seasonal blends. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. and 9 cents per litre for premium gasoline. Although revenue from this product is factored into the study market economics in Part D. 2 E. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Higher octane grades are more expensive than RUL. Today. one must ask how marketers compete. 1 Diesel is another petroleum product sold at many retail outlets. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. a number of factors preclude this type of strategy. as gas stations proliferated. Price competition has forced marketers to optimize outlet revenue. Today. The grade differential varies somewhat from city to city. but in 1995 was typically 5 cents per litre for midgrade. 4th Ed.. Basic Marketing: A Managerial Approach. Ill. This study does not examine such a broad issue however. marketers compete for the consumer’s choice of transportation energy (for example. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. In order to measure competitiveness. Place Typically. Place. Jerome McCarthy. marketers have attempted with some success to differentiate their product offerings from other brands. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline.). RUL prices are therefore most often cited when relating historical price trends.: Richard D. propane vs. 1971). Irving. it represents a very small percentage of total retail petroleum sales. and accordingly.44 (1st Dec. • Product In the past decade. A portion of the market certainly responds to this type of competitive strategy. marketers compete to be represented in as many and/or the best locations as possible.retail gasoline sales respectively1. or when comparing price levels between markets. will ultimately purchase based on price. but most consumers view gasoline as a commodity. Simply put. additives. Price. page 24). 1960) MJ ERVIN & ASSOCIATES 19 . and Promotion. (Homewood. expanded product/services offerings such as convenience items. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. and the price difference between these grades and the RUL price is referred to as the grade differential. competitive strategy of this type focuses heavily on selecting the best place. rather than the most places. p.” or four P’s: Product. commonly known as the “marketing mix2. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. gasoline). etc.

This study presents an extensive historical and comparative analysis of pump prices.• • closure of non-viable outlets. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. Promotional activity seems to have decreased in the past few years. As such. MJ ERVIN & ASSOCIATES 20 . Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Promotion In the gasoline retailing sub-sector. fluctuating pump prices are a significant indicator of robust competition among marketers. caused by price competition. low prices and/or margins.contrary to some public perception. and due to the already slim margins available to marketers. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. and therefore “trades” within a relatively narrow price range. Establishing an objective measurement of price as a competitiveness indicator however. Consequently. price has proven to be the most widely used competitive tool by gasoline marketers.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. is less clear. gasoline is viewed by consumers as a commodity uniform in quality and widely available. uniform prices . volatile pricing manifests itself in the form of a price war (see below). This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. free item with purchase or special price item with purchase. • Price In most markets. volatile prices . At its extreme. probably due to its relatively high cost.while uniform pump prices are sometimes cited as evidence of industry collusion. and more importantly. their subsector margins. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. • • • While examples of all of these indicators are abundantly in evidence. Examples are: • prominently displayed prices . due to the largely commodity nature of petroleum product. this study examines the dynamics of price competition in considerable detail. In this context. Examples of promotional competition are: • • • brand identity gasoline discount coupon. gasoline is a commodity.

since there is no “dealer margin”. To understand the phenomenon of uniform pump prices. since they too must restore their gross product margins to sustainable levels. or even being squeezed to zero . While this support may take one of several forms. the relationship between the supplier and dealer is generally as described on page 25. obviously at the expense of the supplier margin. but to competitors. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. If one dealer decides to reduce pump prices (by two cents. for example). When this occurs. the effect on many consumers is immediate: they will drive into that station. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. one must adopt the perspectives of both consumers and competing. If the posted price increase is too high. The effect of this upon the gross marketing margin is obvious: it is squeezed. its effect is to restore some measure of the dealer margin. are indicators of a competitive market. and provide to the dealer what is commonly referred to as price support. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs.where the ex-tax pump price is equal to. in an attempt to gain market share. competitors will likely match this price. the wholesale rack price. Finding 7: Price uniformity and price volatility. or when prices rise or fall apparently in unison. 1 This does not occur at company operated or commission outlets. facilitated through street price signs. The other dealer has little choice but to quickly match. Price Support In times of “normal” pump prices. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. Whether through falling pump prices or rising rack prices. competitors may not follow.When pump prices are uniform. who then react quickly to the change. This is a misconception. Pump prices therefore tend to move uniformly within a very short time. bypassing the higherpriced outlet. assuming that the rack price is unchanged. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. adjacent dealers. or even less than. Pump price signs are an ubiquitous feature of the retail gasoline industry. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. in order to maintain a reasonable market share. or even undercut the competitor’s lower price. the supplier may temporarily intervene. In the case of lessee or independent dealers however. MJ ERVIN & ASSOCIATES 21 .

Nova Scotia market may provide an example of the potential negative consequences of direct intervention. In addition. but reverts back to the dealer when the support arrangement is ceased. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. While this study does not intend to undertake a detailed review of the effect of the Act. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. An examination of the effect of the Competition Act. and a brief discussion of this case appears in part D. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. however. There are few current examples of direct government intervention in the pricing of petroleum products. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. control over retail pump price effectively reverts to the supplier. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. In addition. the petroleum marketing sector has been the subject of several inquiries at federal. More recently. or of direct government intervention in marketing.Under the provisions of some price support mechanisms. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. is beyond this study’s scope. the Bureau found that there was no evidence to support these allegations1. which is administered by the federal Competition Bureau (Industry Canada). resulting in 9 convictions. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. 1997 MJ ERVIN & ASSOCIATES 22 . These cases have largely involved local dealers and/or isolated incidents. A review of historical retail pump prices in the Halifax. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Following a year-long investigation. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. provincial and even municipal levels. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18.

but exist to meet other important societal needs. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. accounts for about 37% of all refined petroleum demand in Canada. accounting for roughly 88% of all gasoline demand. creating a need for higher margins.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. As a product group however. is in part. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. as outlined above. and is the single largest market for gasoline products. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. or inhibiting. and at least some of this capital cost is regulatory compliance-driven. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. inhibit competition. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. it is the single largest one. MJ ERVIN & ASSOCIATES 23 . creates an obstacle to. or incentive for. accounting for 41% of all petroleum demand. So defined. it is clear that government policy plays an important role in facilitating. sales of gasoline through the roughly 16. It is important to acknowledge that many regulations affecting the retail gasoline industry. for safety and environmental protection. Retail gasoline sales. one can cite examples of regulatory obstacles to exit from the retail gasoline market. The high cost of building a modern retail gasoline outlet for example. particularly in smaller population centres. promotes or limits market-driven pump prices. to some degree. or incentive for. exit from an non-viable market. and consequently. a competitive climate. in the form of standards for the decommissioning of retail petroleum sites. Conversely. Many smaller retail owner-operators. entry into an attractive market. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). that is. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to.500 retail gasoline outlets across Canada. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. This issue is discussed more fully in part D. higher pump prices. A practice. These regulations clearly exist to the benefit of all.

7% Lube/Grease 1.2% Retail Gasoline 37.2% Other 0. This study provides an estimate of the actual retail outlet population.3% Total Sales Volume: 84.2% Asphalt/Coke 4. Figure 5: Canadian Retail Outlet Population .452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. as shown in Figure 5.7% Light/Heavy FuelOils 14.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Propane /Butane 2. This survey accounts only for major established retail networks .9% PetroChem Feedstocks 5.9% Diesel Fuel 22. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.it has no practical means to enumerate each and every outlet.6% Other Gasoline 4.

and the dealer. and this is of some importance with respect to the matter of prices and competition in this sector. The supplier. who manages the day-to-day operations at the retail outlet.The estimated number of retail outlets in Canada has declined from 22. or modes. using Octane counts only) is roughly equivalent to population densities. and all inventory and revenues belong to the supplier. exist between retail dealers and their suppliers.500 in 1995. as owner of the product.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. The principal dealer and attendants are salaried employees of the supplier. controls the setting of the pump price.000 outlets in 1989. the retail outlet is owned and operated entirely by the product supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. and usually owns the brand name seen at the retail outlet. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Several possible relationships. as one might expect. Distribution of these outlets by province (Figure 6. to about 16. who holds initial title to the refined petroleum as it leaves the rack point.

who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. the supplier retains control of the retail pump price. usually based on cents per litre of petroleum sales. but the outlet operator (“dealer”) is compensated by a commission payment. supplier salary from supplier. Control of Pump Price Dealer Compensation supplier a commission from the supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. the outlet facilities and petroleum inventory is owned by the supplier. Since the supplier owns the petroleum product at this type of outlet. The dealer in turn hires attendants. an employee of the supplier supplier supplier typically the dealer.the entire gross product margin accrues to the brand supplier. based on pump sales volume. who pays all outlet operating costs. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . and pays them from his commission revenue. The “dealer” is in essence.sub-component margins .

The dealer pays most or all of the expenses associated with operating the outlet. not the supplier. and means of compensation supplier. and sells at the posted pump price. This Dealer Price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and in turn resells to the motorist consumer at a higher pump price established by the lessee. This dealer margin is defined as the pump price (ex-tax). since it is predicated on contractual arrangements between the dealer and the supplier. can vary considerably from one supplier to another. MJ ERVIN & ASSOCIATES 27 .product from the supplier at a “Dealer Wholesale” price. The margin between these two prices is the dealer’s gross revenue. and has control over the retail pump price. less the Dealer (wholesale) Price charged by the brand supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. dealer-established retail price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. and sells at the posted pump price. unlike rack or pump prices. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. the retail facilities are owned by the dealer. The margin between these two prices is the dealer’s gross revenue. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition.

This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. and fully two-thirds operate as lessees or independents. The remainder represent one of over 50 different marketer organizations. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. 1 Unless the dealer is under a price support arrangement (for instance.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. or Imperial Oil). Petro-Canada. In addition. during a price war) as previously described. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. who themselves establish pump prices. MJ ERVIN & ASSOCIATES 28 . some general figures are mentioned here. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. virtually none of the major integrated outlets are company operated.

Canadian throughputs have dramatically improved in the past several years . Figure 8 depicts the Canadian representation of several key ancillary services. average annual throughputs ranged from under 1 million litres in smaller population centres. more fully described in part C. In fact. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . Many outlets have more than one ancillary offering: many “flagship” outlets for example. ancillary service has had the consequence of subsidizing the pump price of gasoline. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. Most ancillary services are operated by the dealer/lessee. to over five million litres in major markets such as Toronto. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. reduced petroleum margins. these study findings show that this can vary widely from market to market.While an average outlet throughput may be in the order of 2. Based on a sampling of outlets surveyed in this study. has had a profound effect on the retail gasoline marketing sector. In effect. feature both a large-area convenience food store and a modern car wash facility.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken.5 million litres. These improved outlet throughputs have provided for improved petroleum revenue potential. Improved outlet revenue from ancillary operations has caused. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. which in part has led to a reduction in retail product margins. and is a result of.

Since rising prices are common to most consumer goods and services. mainly using Canada average values. Unless noted. This shows that pump prices have increased in nominal terms. the “Canada average” price reflects an average of urban markets only1. Regional and market-to-market comparisons are presented in greater detail in part D. prices are for regular unleaded (RUL) gasoline. an examination of the specific historical record of gasoline prices is useful. including smaller markets. This part examines broad trends in several areas. as can be seen in part D of this study. when the Persian Gulf War caused crude prices to increase significantly. MJ ERVIN & ASSOCIATES 30 . in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. would be somewhat higher. using a Canada 10city weighted (by provincial demand) average. many utilize terms which are explained in part A. An “all markets” average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. Since 1 Data is not regularly collected on smaller markets. and with which the reader should be familiar. As such. particularly around 1990. While some of the presented findings are selfexplanatory. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price.

1990. It also depicts the associated margins. In constant dollars. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. When compared to other consumer goods. nominal pump prices decreased. retail pump prices were about 7 cents less in 1995 than they were in 1986. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. ex-tax equivalent prices. and relative crude cost.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. Figure 10: CPI Index Comparison . Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. rack price. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. as defined in part A of this study. MJ ERVIN & ASSOCIATES 31 . When pump prices are reduced by the amount of tax content. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. as in Figure 10.

Figure 12 shows that industry margins have not been constant over time. it is also useful to examine the behavior of margins. as shown in Figure 12. MJ ERVIN & ASSOCIATES 32 . as the next section shows. and in fact have displayed a declining trend over the past six years. If. and the rise in the tax content. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. and have risen slightly since 1994. the presence of these additional market factors have operated to the benefit of consumers.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. Margin History While Figure 11 provides an indication of key price trends. the downstream industry operates on a “cost-plus” basis. which in turn. In fact. as Figure 11 shows. as might be suggested. then one might expect margins to be quite constant over time. It is important to state that pump price changes do not occur in exact lock-step with rack prices. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. are principally a reflection of changes in the underlying price of crude oil. nor do rack prices exactly follow crude costs. that is. due to additional market factors which affect pump and rack prices at any given point in time. it simply passes on a fixed cost margin to determine the “correct” pump price. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. which are defined by the price points.

crude) 5¢ Marketing Margin (retail . The decline in refiner and marketing margins has both resulted in. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. which have both shown a consistent decline throughout the period 1991 to 1996.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. and has been a result of. as local competitive factors act to self-regulate pump prices. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. 1 In fact. this upward trend is not attributable to “downstream” refiner or marketing sector margins. the actual fluctuation is much more pronounced than shown. A more thorough discussion of specific market factors for these and other centres appears in part D.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . since the chart is based on monthly averages. Finding 13: From 1991 to 1996. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. MJ ERVIN & ASSOCIATES 33 . Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. This shows that on a monthly basis. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. compared to the Canadian average. several factors. the gross marketing margin can fluctuate quite significantly1. not weekly or daily data. In particular.

This difference accounts for most. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . US Price History The retail gasoline tax structure in Canada is vastly different than the US. A comparison of Canadian and US regular gasoline pump prices. with and without tax. is presented in Figure 14. resulting in significantly higher Canadian gasoline prices. Canadian pump prices have been roughly equal to. This shows that.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs.Figure 13: Monthly Gross Marketing Margins. or even less than. On an ex-tax basis. although Canadian pump prices in urban markets are clearly higher than in the US. for several years. if not all of the difference in pump prices between Canada and the US. US pump prices. this is wholly attributable to the difference in taxation.

This would be a useful area for further research. From this it can be seen that Canadian and US rack prices. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. • Although this study shows that on an ex-tax basis. as a result of outlet closures (see Figure 5. have improved considerably. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Figure 15 compares these values for selected Canadian and US centres over a period of several years. While these trends have also occurred in the US. page 24) and somewhat increased demand. both a cause and an effect of improved throughputs and ancillary revenues as previously described. RFG has not been introduced to Canadian markets. Canadian outlet throughputs (although likely still less than those of the US). behave in a very similar fashion. Prior to 1994. trading at any given time within a relatively narrow (about 2 cents per litre) range. when compared on an ex-tax basis. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. which is reflected in US average pump prices. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. and moving up or down more or less in unison. This is no longer the case however. Canadian ex-tax pump prices were historically somewhat higher than in the US.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.

albeit less distinct pattern. and as would be expected in any commodities market under these conditions.900.100.900.700.500. and falling in the latter half of each year. the price tends to be bid upwards.700. Price History Figure 16 shows the history of Canadian gasoline demand. Simply put. Pump Price (nominal ¢/litre) 3. Gasoline demand exhibits a very regular seasonal pattern.000 2. a “buyers market” develops.000 34¢ 2.000 2.000 1. or indeed anywhere. but in fact across the North American continent (US demand follows a similar pattern). of motor gasolines from 1991 to 1996. Yet in the latter half of each year. or sales. as demand ebbs and inventory improves.000 2. conditions begin to favour a “seller’s market”.500.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. rising and falling closely in step with demand. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 2.000 1. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. compared to average ex-tax regular gasoline pump price for the same period. As non-refiner marketers attempt to secure a supply of this diminishing inventory. and prices tend to fall. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .100. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. Figure 16: Monthly Demand vs. increasing significantly every spring. Demand vs.300. Gasoline price exhibits a similar. not only in a given market.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 24¢ 1.

which consists of the refiners and marketers of gasoline and other petroleum products. so do prices. has operated in a highly competitive environment. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. On a long-term basis however.Whether in the spring or the fall. This is of course. which ensures a competitive product price for buyer and seller alike. gasoline prices have not followed the traditional model. demand rose approximately 8. This part of the study presented a number of historical views of retail gasoline prices. while average ex-tax pump price declined by 14% (since 1994. while world crude prices and Canadian taxes have generally increased over the past several years. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. All of the findings suggest that. a feature of most marketregulated commerce. and product taxes which add to the consumer price of gasoline. despite a rise in demand. pump prices have increased due to a significant rise in crude costs in this period). their related product costs and margins. MJ ERVIN & ASSOCIATES 37 . and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. Figure 16 shows that from 1991 to 1995.3%. the essence of a free market economy. competing to meet their own needs. The traditional supply-demand model predicts that when demand rises. the downstream petroleum industry. in that prices have fallen. as evidenced by declining industry margins. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada.

namely product margin. is useful in providing broad overviews of industry price and margin trends. play a role in a market’s pump price. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and in order to provide insights into the range of competitive dynamics that may exist. A number of factors such as taxes. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. etc. there is no regular monitoring of pump prices in smaller centres. although one was subsequently dropped due to insufficient submitted data. and pump prices alone provide very little opportunity for “comparability”.. and a more detailed examination of price. Nineteen markets were therefore adopted for the study (Table 3). but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. ancillary revenues. These “outside factors” tend to obscure the more relevant aspect of pump price. • Methodology Selection of Markets A number of markets were selected for the study. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. freight.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. outlet costs. MJ ERVIN & ASSOCIATES 38 . outlet volumes.

and Group B markets less than 500. the gross marketing 1 Although White Rock is clearly not a major centre by itself. In addition. retail pump prices . Suncor Inc. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. Shell Canada. To this end. or “rack to retail” sector. Five companies responded to this request: Imperial Oil.000. Ontario.Each market was classified according to regional affiliation (BC/Prairie. 2 Depending upon the outlet mode. and for smaller markets. In all.are influenced not by one. the gross marketing margin must be examined in isolation from those other variables.and consequently competitiveness . price history data not available through public sources. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. these organizations provided market-level data on freight costs. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. To examine the competitiveness of the marketing.0001. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. MJ ERVIN & ASSOCIATES 39 . it was essential to obtain data not normally available through existing public sources. and Canadian Tire Petroleum. Petro-Canada. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Furthermore.. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. retail outlet and brand representation. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. but a number of variables. Process Overview As illustrated in part A.

MJ ERVIN & ASSOCIATES 40 . Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. these were weighted by volume. by product grade. rack price. to derive the 1995 average gross product margin for each of the study markets. Group B (smaller market) and 19-market study averages. to arrive at “blended” values2. This allows for an accurate determination of net outlet revenue. average pump prices are higher than actual average regular gasoline prices. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. and freight. and freight were successively removed from the pump price. tax content. Where applicable. in addition to operating cost and ancillary revenue data gathered in the study1.margin is stripped of its freight component. and the final “rationalized” gross product margin was determined for each market. as the “blended” price includes other product grades. The gross product margin thus serves as an interim basis for comparing study markets. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. From participant company supplied data. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. average outlet annual throughput was determined for each market. The variables of tax content. 2. 3. a market-by-market profile of outlet income is presented. weighted by sales demand. a broad representation of markets was possible. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). Finally. rack price. Using the derived gross product margins and volumes for each market. 1 Although outlet cost and ancillary revenue data was not available for all markets. including some smaller centres. Where differences in gross product margin might still exist. 1995 average values were determined for pump price. 2 Accordingly. For each market.

encompassing a significant portion of the entire Canadian market. and therefore where assumptions were made. marketing margin.7 million. MJ ERVIN & ASSOCIATES 41 . so that on a cents-per-litre basis. 5.4. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. including relatively smaller ones such as Sioux Lookout or Gaspé. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. The derived weighted average values of pump price. grade differentials were based on known differentials of nearby markets. Unlike retail pump prices however.. Bloomberg rack price values were used as the assumed wholesale price. These differentials do vary from one market to another. Also. etc. 6. average revenues from ancillary services were added. objective data exist for both of these values. perhaps by 1 to 2 cents per litre. This value was then applied to the gross product margin to determine average outlet petroleum revenue.. accurate comparisons are possible. or consolidated net incomes. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. and gross product margins are therefore likely to be understated. a recognized source of data on world crude oil and petroleum markets and prices. Interpretation of Data In some smaller centres.. it is important to understand that the use of rack price in this analysis has certain implications. represent a broad range of markets. petroleum revenues. When these margins are applied to outlet throughputs as in step 4 above. While clear.. freight. Supplier Overhead costs. In referring to marketing margins. many wholesale petroleum purchases are made at less than the “posted” rack price. .. This variation is constant across all nineteen markets however. but they are relatively minor. and supplier profit. and outlet operating costs were deducted from total revenue. also considering that RUL constitutes the majority of product. product margins. Wholesale refined product prices used in this study are therefore likely to be overstated. From participant company data. the effect on the “blended price” is small. these 19 markets represent a combined population base of 8. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. A dollar-per-outlet estimate of these elements was made. as described on page 10. and from one brand to another.to determine average consolidated net revenue per outlet. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. 7. and accordingly represent a broad spectrum of consumers and marketers.

The data shows a statistical pump price variance of over 17 cents per litre within this study group.64 cents per litre in pump price. there is little to suggest why such a high variance exists. accurate. table J for an explanation of how variance is derived.8 cent difference in pump price 1 See footnote at Appendix II. but a variance of only 12. Tax Figure 19 shows posted pump prices for the study markets. The data also shows that typically. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.Rack prices used in this study are nevertheless market-driven. The study data suggests that variations in tax rates account for a significant part of pump price differences. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. broken into tax and extax components. MJ ERVIN & ASSOCIATES 42 . Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. A 6. while lower prices tended to prevail in major centres. The 19-market study group exhibited a statistical variance1 of 17. independently gathered data. higher priced markets are associated with smaller population centres. The first of these variables to be examined is tax. and based on objective.38 cents per litre in ex-tax pump price.

Upstream and Gross Refiner Margins Although the deduction of tax content is useful. but the variance is minimal . The data shows that taxation between markets within the same province varies little. it is therefore more useful to use ex-tax pump prices when comparing any two markets. when examined on an ex-tax basis. 1 Due to pump price differences. This eliminates any effect that tax variability may have. additional elements of the revenue stream must be further isolated. namely the upstream industry and refiner sector. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry.between Calgary and Vancouver for example. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. MJ ERVIN & ASSOCIATES 43 . the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. or when examining historical price trends. accounting for roughly half of the average retail price. as described in part A. GST content can vary by market. provincial tax rates can vary greatly. while taxation between provinces is more pronounced .75 cents per litre (Vancouver. was less than three cents. In all study markets. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity.while all markets are subject to the same rate of federal excise tax and GST1.less than one-half cent per litre.tax. Montreal). ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. thus providing a better basis for comparison. taxes were a significant element of pump price. Figure 19: Pump Price .

Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. and therefore are best analyzed separately. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. but ultimately.assuming transport costs did not outweigh the price difference. differ little from those of major centres. as is examined below. the rack price is set at the rack point (Winnipeg. To address this. rack price) and gross marketing margin elements. one region cannot maintain rack prices at a higher level than another. as this would cause rack buyers to bring product in from the lower-priced region . rack and pump prices. Furthermore. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. When rack price is deducted from the ex-tax pump price. the validity of analyzing gross marketing margins in isolation might be raised. This is due to the fact that for any market. and their respective margins. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. if a clear understanding is to be achieved. MJ ERVIN & ASSOCIATES Cents per litre 44 . reflecting some differences in refinery crude acquisition costs. reflecting the reality that at the rack level of competition.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. Freight costs are additional. the rack price is equivalent to the upstream margin plus the refiner’s margin. it should be restated that each of these sectors. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. in the case of Thompson). are clearly delineated by market-driven crude. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group.

remote population centres. For markets which are also established as rack points. generally smaller markets. Before using this as an analytical tool however. Figure 21 shows a study market comparison of gross marketing margins. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.0 cents per litre. one final outside variable must be isolated: that of product freight. resulting in comparative gross product margins. and therefore a significant pump price factor. in fact. this freight cost is almost negligible. it is therefore important to eliminate the freight variable from the gross marketing margin. Two of the study markets had freight costs in excess of 3. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.49 cents per litre (gross product margin). To provide a comparative view of the marketing dynamics within the study group.16 cents per litre (gross marketing margin) to 7. as low as 0. the data shows that freight is often a significant part of the gross marketing margin.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector.3 cents per litre. Although freight operations are often an integral part of many petroleum marketing operations. MJ ERVIN & ASSOCIATES 45 . Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. it is essentially a “non-core” business. particularly in comparisons of major urban markets to small. For other. with their component freight costs.

while Group B markets averaged 7.a variance of only 2. MJ ERVIN & ASSOCIATES 46 .06 cents per litre. at 3. For all study markets.the gross revenue available to the petroleum marketing sector for its operations. to the resultant retail gross product margin . Group A (larger population) markets averaged 5. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.5 cent variance in gross product margin is still significant however.22 cents per litre Smaller markets showed a wider variance in gross product margin . A 7. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.68 cents per litre. as the 3. 1995 gross product margin averaged 5.6 cents) to the variance in their component gross product margins (7. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. was the highest of the study group.17 cents per litre.6. or consolidated net incomes. In referring to marketing margins. at 14. petroleum revenues.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.68 cents per litre1. Gaspé.42 cents per litre. while Toronto. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. The study revealed that: • • Retail gross product margins differ very little between major urban markets .5 cent per litre average relates to regular gasoline in major markets.5 cents per litre average Gross Product Margin cited in Part B. or between any two regions.95 cents per litre. was the lowest.5 cents). product margins. Bloomberg rack price values were used as the assumed wholesale price.

differences between markets.2 cents per litre in Gaspé.000 litres per year (Toronto).000.000 2.000 Litres 3. ranging from under 700.000. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000. if any retail gasoline outlet located in the Toronto area for example. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. Figure 23: Average Annual Throughput per Outlet 6.000.000. A wide range of volume performance is evident.000 litres per year (Sioux Lookout) to over 5. it would likely be so unprofitable as to be un-viable. a wide range of variability still exists between markets in the study group . once isolating retail gross product margin from all of the “outside” pump price factors.000.14. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. vs. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000 5.000 4. an examination of related outlet throughput volumes is necessary. for example. Indeed. 3.000 1. If these two factors are related to each other as they are in Figure 24. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000. sold significantly less than 5 million litres of petroleum per year.1 cents per litre in Toronto.

000 2.000 3.7 million respectively.000.000. they remain essentially the same regardless of volume changes . and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. Smaller markets perform as competitively as larger centres.000. compared to 2.6624 1.that is.000 Volume (litres) 4. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. Although MJ ERVIN & ASSOCIATES 48 . With few exceptions.962 R2 = 0. Ontario. while those with high Gross Product Margins tend to have low outlet throughputs. not of poor competition.42 cents) than smaller (Group B) population centres (7. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.6634Ln(x) + 76. If all outlets in a given market experience generally low throughputs. the Group A market outlets had roughly 50% more throughput than Group B outlets . Regionally. all market groups (BC/Prairie.000. As most outlet operating cost are fixed in nature . Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000.4 million litres annually.000. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.95 cents). On average however.000 6. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. it follows that higher gross product margins will be the consequence.000 5.Figure 24: Outlet Volume vs. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.

716 .000 5.000.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences.000. in addition to petroleum sales. Gross product margin. however. this is likely due to the higher incidence of Group B study markets within this region. is only a measure of petroleum revenue per litre. Consolidated Net Revenue per Outlet To create a complete.000 3. In reality. product cost. and must be examined. which for the study group. and supplier MJ ERVIN & ASSOCIATES 49 . supplement their incomes with other revenues. and ultimately shows that very little difference in competitiveness exists between any two markets.000 2.000. and the resultant consolidated net revenue. It represents the residual revenue which is available to the dealer and to the supplier. averaged $69. ancillary sales. and auto service. and incur many expenses in the course of their commerce. Ancillary revenues are those derived from non-petroleum sales sources.000 6. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). Figure 25: Outlet / Volume Relationship . which.000. two additional factors are introduced: ancillary revenue and outlet operating costs. supplier overhead costs. such as convenience stores.000 4. These additional factors clearly have an effect on the relative competitiveness of retail markets.000.000.the revenue available for dealer income. competitiveness occurs between retail outlets. outlet-based view of retail markets. while operating costs are those costs which are directly incurred in the operation of the retail facility. less outlet costs. Figure 26 summarizes total outlet petroleum sales. car wash.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. as described below.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.

000) $(350.000) $(250.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(200. In effect. An examination of these component elements reveals a significant finding: that for most markets. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000 vs. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. and his personal labour investment. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 $150. reduced pump prices. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 per year respectively .000 $250. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. Figure 26: Outlet Revenues. Most markets showed relatively similar net revenues (see Appendix II. Table K).Group B outlets were not as profitable as these revenue values might suggest.000) $(300.000 $50. Costs.profits. these ancillary operations contributed to a lower product margin and consequently.000) $(100. causing the weighted average for Quebec / Atlantic to be depressed). Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .$154. Income BC/PR $300. A discussion of the ultimate distribution of this revenue is useful.000 $200. As described above. $60. which reflects his investment in the outlet.000 $100. MJ ERVIN & ASSOCIATES 50 . Finding 19: Based on published rack prices.000) $(150.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. as explained below.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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745 18 446 2.Vancouver population # of brands # of outlets outlets per 10.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.98 ¢ 0. The somewhat high margin placed this market slightly above. while average throughput ranked 4th.968 litres 7. contributing to a higher than average pump price.38 ¢ 7.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Figure 28: Vancouver .000 1.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . Vancouver provides several perspectives into retail marketing.658. this market has access to numerous refiners along the Pacific coast through marine supply. Vancouver is also a terminal for a refined products pipeline from Edmonton. a 60.542.000 barrel per day plant located in the greater Vancouver area. Vancouver collects a 4 cent per litre municipal tax. Geographic / Supply / Freight cost considerations: As a port city. and with access to wholesale product by several means. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Influence of other markets: Although relatively close to the US border. ranking 11th. but well within a cluster of markets with similar throughputs. as described below. This may explain the somewhat elevated gross product margin in this market. net outlet revenues were less than those of other major centres.ex tax Canada Average . and also has local refining capacity. Overall. Low consolidated net revenues may have contributed to the higher margin. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.

This market is close to its usual rack point. gasoline “cross-border shopping” is less pronounced than might be expected.000 16.315 4 8 4. but less than most markets with a small population base. In all respects. Despite its relatively small size. thus providing some unique characteristics for the market study. Freight costs were accordingly low compared to other small markets in this study. adjacent to the United States border. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. This is likely due to the fact that unlike many smaller markets.604.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. this market is subject to a 4 cent per litre municipal tax. This suggests that. at least in this market. Vancouver. the study data found little to suggest a material effect upon representation. due to its proximity to one. Average outlet throughputs were relatively high.630 litres 7. the White Rock retail gasoline market displayed the same attributes as a major urban market.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. prices. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Price history / Taxation: Although no specific data is available.45 ¢ 7. White Rock’s margin was typical of markets with similar outlet throughputs. prices in this market have historically mirrored those of Vancouver.White Rock population # of brands # of outlets outlets per 10. MJ ERVIN & ASSOCIATES 55 . Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.98 ¢ 0. and retail gross product margin was less than that of markets with a similar population base. or competitive dynamics. Like Vancouver. Geographic / Supply / Freight cost considerations:. White Rock is essentially part of a major market due to its proximity to Vancouver. Influence of other markets: Although this market is a border-crossing community.

Consolidated net revenue: was typical of other major markets in the study group. Rack-to-outlet freight costs are among the lowest in the study group.719 litres 6. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. pump prices in this market have historically been well below the Canadian 10-city average.827.47 ¢ 0. Indeed. creating some competitive pressures (see Nanton).23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.Calgary population # of brands # of outlets outlets per 10.675 27 313 4.000 710.ex tax Canada Average . Product is usually sourced from Edmonton refineries via pipeline.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. indicative of a strong competitive climate. Calgary is of sufficient size to support a viable rack market. Other considerations: Of the markets studied. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Influence of other markets: Calgary is fairly remote from US and other major markets.24 ¢ 6. Some smaller markets in the vicinity have occasionally priced below Calgary. Figure 29: Calgary .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Calgary pump prices are very close to the Canadian average. which was one reason for selecting Calgary as a study market. Price history / Taxation: As the figure below shows. Calgary had the third highest number of retail brands.

Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. supply/demand is likely more balanced. and therefore experiences no particular influences from any other major market. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 .089. it is likely that this reflected a surplus of wholesale inventory within the local market or region.000 179. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Consolidated net revenue: was typical of other similar markets.794 litres 7.180 15 86 4. price volatility has eased. Since then.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Although no supporting data is available. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.ex tax Canada Average . reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. and a history of volatile pump prices. This is partly due to provincial taxation levels. Influence of other markets: Like Calgary. and this market is now more typical of other large population centres. Ex-tax prices are also above average.Regina population # of brands # of outlets outlets per 10.50 ¢ 0. Figure 30: Regina .29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. which are among the highest in Canada.21 ¢ 7. margins and throughputs were typical of other markets with a similar population base. Since 1993. this market is removed from other significant markets. and is therefore a recognized rack pricing point. Regina was of some interest as a study market.

like most markets of this population density.ex tax Canada Average . Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. probably related to a regional surplus of wholesale inventory (see Regina). On an ex-tax basis. and therefore experiences no particular influences from any other major market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .Winnipeg population # of brands # of outlets outlets per 10.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .22 ¢ 7. although there is no study data to support this. Influence of other markets: Like Calgary. Price history / Taxation: In the early 1990’s this market experienced some price war activity. This may reflect a lower than average Consolidated Net Income. this market has exhibited relatively stable pricing. it is an established rack price point. possibly due to modest ancillary revenue.790 17 261 4. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.217 litres 8.000 616. Figure 31: Winnipeg . although. though somewhat higher than average ex-tax pump prices. Since then. prices have tended to stay somewhat above the Canadian average.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable.265. Consolidated net revenue: No ancillary or outlet cost data was available for this market.06 ¢ 0.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market is removed from other significant markets. and has remained very close to the Canadian 10-city average.

Nanton had a high number of per capita outlets . Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices.071.000 litres 5. Nanton appeared to benchmark its pump prices to those of Calgary.far in excess of what would be expected of a community with a population of 1. although not as low as expected. Consolidated net revenue: No Ancillary or cost data was available. While these conditions would normally result in a high gross product margin. it is likely that low operating costs. a feature not available to other. more isolated small-town markets. in terms of expected petroleum revenues. Average outlet throughputs were relatively low. situated on a major North-South highway to the United States Among the study group. MJ ERVIN & ASSOCIATES 59 . this market has a relatively low freight overhead. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.and a low average outlet throughput. Price history / Taxation: In order to attract market share beyond simply the local population. Nanton was perhaps the least viable market in the study group.600.the highest of the entire group . as Figure 24 shows. Alberta population # of brands # of outlets outlets per 10.91 ¢ 0.585 4 5 31. Influence of other markets:. placing Nanton well below the expected margin. the retail gasoline market in Nanton was not restricted to the local population.Nanton. Due to its highway location and its proximity to Calgary.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. In this respect. Nanton was the smallest market in terms of population. would have an offsetting effect. Nanton had the second lowest gross product margin of the study group. and perhaps healthy ancillary sales associated with highway traffic. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Unlike many of the smaller markets in this study group.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Nanton has traditionally priced either at or below Calgary. the Nanton retail gasoline market displayed the same price attributes as a major urban market. Despite its small size. while others experience consistently high prices. in order to maintain a share of the considerable potential sales revenue that passes through this market.41 ¢ 5.000 1. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. due to its proximity to one.

this market has little or no influence upon. isolated markets. In contrast to Nanton. and in fact fell into a tight cluster of four other study markets. Peace River also experiences high freight costs.6 cents per litre. nor is it influenced by. isolated markets. and was accordingly chosen as a study market.Peace River. Supply is via tanker truck from Edmonton. Geographic / Supply / Freight cost considerations: At 1. its normal rack point. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply.6 ¢ 10. Price history / Taxation: Peace River is typical of small.45 ¢ 1. high pump prices. and due to its isolated locale in northern Alberta. they were comparable to other markets with similar average throughputs. MJ ERVIN & ASSOCIATES 60 . Alberta population # of brands # of outlets outlets per 10.157.715 6 8 11.000 6. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. though fairly typical of many smaller. Peace River has among the highest freight cost in the study group. experiencing relatively high gross product margin and consequently.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. other markets. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.623 litres 12. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. further adding to overall high pump prices.

the community of Thompson clearly falls into the category of a small.000 14.520 litres 14.975 5 6 4. Thompson is faced with the dilemma. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. Price history / Taxation: Thompson was typical of small. and in fact fell into a tight cluster of four other study markets. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Influence of other markets: Since is not located on a major inter-uban thoroughfare. further adding to overall high pump prices.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. isolated markets. other markets. remote market. high pump prices. experiencing relatively high gross product margin and consequently. It also experienced high freight costs. outlet costs were also modest typical of most smaller markets. Although outlets in Thompson appear to be as competitive as those of any other study market. thereby creating the potential for narrower margins. nor is it influenced by.014. MJ ERVIN & ASSOCIATES 61 . its usual rack point.1 ¢ 3. These factors resulted in relatively strong per-outlet net revenues. Consolidated net revenue: Low outlet throughputs were offset by higher margins.Thompson. Manitoba population # of brands # of outlets outlets per 10. and reduced pump prices. Geographic / Supply / Freight cost considerations: At 3. resulting in per-outlet petroleum revenues which were quite typical of many markets. This however. and due to its isolated locale in northern Manitoba. a significant portion of which would likely be distributed towards supplier overhead costs.02 ¢ 11.02 cents per litre. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Other considerations: Like other small markets. Although ancillary revenues were the smallest of the study group. Thompson is among the highest freight costs in the study group. this market has little or no influence upon. Supply is via tanker truck from Winnipeg. they were comparable to other markets with similar average throughputs. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential.

Consolidated net revenue: Although no study data was available for this market. it had the second highest brand variety of the study group. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. as evidenced by an exceptionally low gross product margin. Influence of other markets: This market is continuously linked with several other major retail markets. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. Margin/Throughput relationship (Figure 24): This market stood apart from the study group.775 30 546 2. Figure 32: Toronto .478 litres 3.36 ¢ 0. this market was consistently less than the 10-city average. stretching from Pickering to Buffalo.000 2.Toronto population # of brands # of outlets outlets per 10. and first in average throughput per outlet. On an ex-tax basis however. In addition.06 cents per litre. With an average “blended” gross product margin of only 3.275.3 ¢ 3. similar to that of Montreal. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. it is likely that outlet ancillary revenues are among the highest in the country. thus there exists a climate of robust competition.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . New York. It consequently has a low freight component.extax Toronto Posted Price . this market ranked first in a number of measures: lowest gross product margin.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Within this region are thousands of retail outlets.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. least number of outlets per capita.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. and is also relatively close to wholesale supply sources in the US. This is likely offset by high operating costs. and a resultant low consolidated net revenue.098.

Figure 33: Ottawa .145 19 209 3. slightly lower that expected. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. several smaller. Consolidated net revenue: was low. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.Ottawa population # of brands # of outlets outlets per 10. Although petroleum revenues were typical of major markets.004. Other considerations: While pump prices in this market were somewhat higher than in Toronto.29 ¢ 5. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. and close to the Canadian 10-city average.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .97 ¢ 0.948 litres 5. freight costs within this market were quite low. ancillary revenue was slightly lower than average. and operating costs were higher than most. some of which have on occasion priced below Ottawa (see Nanton and Calgary). This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. rural markets co-exist in this area.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 .08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.ex tax Canada Average . in fact.000 678. Influence of other markets: Although Ottawa is the only major market in the immediate area. exhibiting all of the characteristics of robust competition.

Sault Ste Marie population # of brands # of outlets outlets per 10. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. somewhat isolated. a product of relatively strong net petroleum revenues combined with lower than average operating costs. MJ ERVIN & ASSOCIATES 64 .475 10 24 2.465. This would suggest that a significant market share is being lost across the US border. Sault Ste Marie is a sizable market.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. a consequence of the transport distance from the rack point.550 litres 8. Freight costs are therefore high. and between 5 to 8 cent per litre in gross product margin. average throughputs were modest. this Canadian market has some difficulty in remaining both competitive and viable.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. and accordingly.000 81. yet with some potential for cross-border retail competition. Pump prices in this market were thus typical of any market with similar throughput characteristics. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). partly due to higher freight costs. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Influence of other markets: This market is close to a US border market. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.73 ¢ 1.22 ¢ 7.

066 litres 14.96 ¢ 3. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. and had the least number of outlets. this market experiences a high degree of price competition. despite its high prices. one-seventh the average throughput in Toronto. and outlet throughputs of any market studied.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694.Sioux Lookout population # of brands # of outlets outlets per 10. largely due to higher freight costs. although high. with little or no influence from other retail gasoline markets. Consolidated net revenue: No data was available for this market.310 3 3 9. Influence of other markets: This is clearly an isolated market. brands. Freight costs are therefore high.2 ¢ 11. This is a major factor in the high cost of gasoline in this market.000 3. This would suggest that.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. It therefore presents some unique characteristics for the market study. was much less than expected for a market of this size. Sioux Lookout is well-removed from any major highway. in fact the second highest in the study group. MJ ERVIN & ASSOCIATES 65 . so that virtually all sales volume represents local demand only. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. An average outlet in Sioux Lookout pumped only 694.006 litres in 1995.

775. placed Montreal lowest of all study markets in terms of consolidated net revenue.144 litres 5. and is also relatively close to wholesale supply sources in the US.3 ¢ 5. This.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market ranks first of the study group in terms of brand variety. an additional tax of 1. thus promoting a competitive climate.394. Influence of other markets: Like Toronto. Price history / Taxation: As the figure shows. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.extax Montreal Posted Price .13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. with resultant low average outlet throughputs. On an ex-tax basis however. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Figure 34: Montreal .Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . Montreal was included in the selected market study. this market interacts with several other markets in the region. It therefore represents a highly competitive rack market. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. With 32 competing brands. a function of a competitive rack market and an excess of retail outlets competing for market share.Montreal population # of brands # of outlets outlets per 10. combined with low petroleum revenues and high operating costs.5 cents per litre was introduced into the Montreal area).43 ¢ 0. pump prices in Montreal have generally been at or below the 10-city average for major markets.000 1. pump prices in this market have a tendency to be volatile. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.870 32 866 4.

Nevertheless. both pump and ex-tax prices in this market were higher than average. although low.000 120. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. yet is geographically quite isolated.289 litres 12. this market has little potential as a rack market.28 ¢ 1. Consolidated net revenue: was average among the study group.605 14 97 8. In the case of Chicoutimi. Margin/Throughput relationship (Figure 24): Outlet throughputs. but as the figure shows.250.08 ¢ 11. by tank truck. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.Chicoutimi population # of brands # of outlets outlets per 10. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. Freight costs are therefore somewhat high.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. within a cluster of other markets with similar attributes. this amounted to a reduction of 5.75 cents per litre. but is quite isolated from any other markets.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Gross product margin was accordingly high. a partial factor in the high cost of gasoline in this market. Chicoutimi is normally supplied from the Quebec city rack. MJ ERVIN & ASSOCIATES 67 . for example). were quite typical of markets with similar populations.

Influence of other markets: This is clearly an isolated market. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group.33 ¢ 14. in fact the highest in the study group. with little or no influence from other retail gasoline markets. in the case. Consolidated net revenue: No data was available for this market. so that virtually all sales volume represents local demand only.17 gross product margin the highest of the study group. Nevertheless. ancillary revenues would likely be modest. Freight costs are therefore high. by tank truck. a product of high freight costs and gross product margins.Gaspé population # of brands # of outlets outlets per 10. Nevertheless. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. amounting to a reduction of 5. MJ ERVIN & ASSOCIATES 68 .17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.400 6 13 4.75 cents per litre.000 16. Gaspé is well-removed from any major highway. a key factor contributing to its 14. located at a considerable distance from its rack source of supply.50 ¢ 3.900 litres 17. both pump and extax prices in this market were higher than average. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. This is a major factor in the high cost of gasoline in this market.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. this margin was only slightly higher than expected for a market with these throughput attributes. Although operating costs are likely to be low in a small market like Gaspé.

which for Saint John.ex tax Canada Average . Accordingly. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. resulting in lower than expected average outlet throughputs. Price history / Taxation: Historically. Saint John presents some unique characteristics for the market study. Figure 35: Saint John NB .extax MJ ERVIN & ASSOCIATES 69 . this market fell within the expected range of gross product margins as a function of outlet throughput. and is capable of shipping and receiving wholesale product through marine facilities.970 9 56 7. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.095.694 litres 9. freight costs in this market are low.27 ¢ 9. Nevertheless.Saint John NB population # of brands # of outlets outlets per 10. with or without a local refinery. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. retail pump prices are ultimately a reflection of rack prices.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Since provincial taxes are among the lowest in the country. Consolidated net revenue: was average for the study group.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. ex-tax prices were relatively high.79 ¢ 0. In fact.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. and therefore. reflected in the high ex-tax pump price. Average gross product margin was consequently high.000 74. posted pump prices in the Saint John market have closely followed the 10-city average. do not differ markedly from any other rack point in the study group. it is an established rack point. the Saint John retail market is relatively isolated from other retail markets of any significance.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US..... .. when compared on an ex-tax basis......... ......... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs............... ................................... the profitability of the 481 outlets studied appears only marginal.. The viability of the Canadian retail gasoline sector as a whole may be somewhat better............. and likely a negative impact on consumers.................... 48 Finding 19: Based on published rack prices. given the possibility of discounts from posted rack prices and potentially lower overhead costs................. In effect.................. which in turn.................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.... which ensures a competitive product price for buyer and seller alike.......................... are principally a reflection of changes in the underlying price of crude oil.................................................... residuals for outlets not studied may be better................ petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied............ Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads...................... particularly in comparisons of major urban markets to small................ reduced pump prices............................................................................... .. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences........ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre..... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness........... 71 MJ ERVIN & ASSOCIATES 73 ................................... remote population centres.. the residual represented a net loss to the supplier.................. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations............ 50 Finding 20: For the 481 individual outlets studied. these ancillary operations contributed to a lower product margin and consequently........... while those with high Gross Product Margins tend to have low outlet throughputs.. a feature of most market-regulated commerce......................... ... 33 Finding 13: From 1991 to 1996.51 Finding 21: Based on published rack prices and the individual outlet data................ the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.............. .....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.................................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements...................................... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes..............

The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. was observed (Finding 10). Rack and pump prices are determined in competitive marketplaces. This has not simply been a result of a decline in underlying raw materials costs. The Canadian retail petroleum products industry. the very margins within which this industry operates has. when taxes were excluded (Finding 14). Virtually all of the competitiveness indicators examined in this study relate to price. place. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). price is but one of four competitiveness “tools” available to marketers (product. The study presents such a model. Canadian prices have been at or below US prices in recent years. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Although an objective measure of competitiveness is elusive. 1. On a national level. As described in this study however. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. is mistaken. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . The resultant margins. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. over the long term. each with unique dynamics. In comparing several diverse markets. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. in comparing Canada average (city) pump prices to those of the United States. exhibited a diminishing trend (Finding 13). a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). was shown to be strongly competitive: • A long-term decline in pump prices. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. by all objective measures available to this study. 2. when measured in constant and nominal dollars.

3. but also rack prices and outlet performance. these markets have managed to sustain a certain level of viability and competitiveness. for example) were rationalized. municipal levels of government. This would entail the tracking of not only pump price. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. The demonstrated exception to this is in markets directly adjacent to nearby US markets. and do. vary considerably from one population centre to another. While some markets. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. MJ ERVIN & ASSOCIATES 75 . provincial. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. well over half of all outlets in Canada operate as lessees or independents.even negative values. but even in such cases. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). Due to the localized nature of competition in the retail gasoline marketing sector. In applying such a model to the retail petroleum marketing industry. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. crude costs accounted for roughly 34 percent (Finding 2). and in some markets. taxation as an element of public policy is an area worthy of additional research. since this is the effective range of consumer choice. measured against the average outlet throughput for that market. and accordingly. rack price and freight cost. particularly smaller ones. generally do not serve as competitiveness inhibitors. Petroleum product taxes are levied at the federal. demand and other competitive factors existing at the time.3 cents or 9 percent (Finding 5). The latter two can vary considerably from one market to another. Dealers were shown to have a variety of relationships with their supplier. and are a predominant cause of inter-regional pump price differences (Finding 16). the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). it is important to understand that. or even between Canadian markets with differing tax structures. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. This implies that the competitive dynamics pertaining to these retail markets can. or 6 percent (Finding 6) of the 1996 average regular pump price. experienced higher than average pump prices. and in some markets. presents a competitive disadvantage to Canadian marketers. refiner margins accounted for 5.5 cents. but given its magnitude. and product margins accounted for 3. when the “outside” factors (tax. retail petroleum markets are considered local (municipal) in scope. Taxation is a significant factor in the price of retail gasoline. are thus a reflection of the state of product supply. taxation differences between Canadian and US markets. By contrast. an exercise that consumers are unlikely to engage in.

which in turn. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). supplier costs and profitability. Sioux Lookout.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). on a per litre basis. fluctuating prices are a strong competitiveness indicator (Finding 7). and a loss in the case of urban markets. Rack prices were shown to not significantly differ between major centres. dealer income. which represent the majority of Canada’s population base. This margin represents gross revenue (after wholesale product and freight cost) which. reflecting consumer demand behavior (Finding 15). 4. when examined on the margin-volume model.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. In fact. The pump price/margin model shows that in 1996. Viewed from this perspective. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Pump price fluctuations can be an indicator of competition in the marketplace. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. and more price-stable markets such as Sioux Lookout. the absence of price war activity does not imply a lack of competitiveness. second only to the United States. Demand for gasoline was shown to vary significantly according to the time of year. Retail gasoline marketing revenues. showed a close relationship to underlying crude prices (Finding 11). in a highly distinct. incorporated with ancillary revenues and outlet costs. which in turn is the principal driver of ex-tax pump prices. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. predictable seasonal pattern. While price wars are undoubtedly an indicator of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. exhibited competitive traits typical of any of the study markets. on the basis of price fluctuation alone. is available to provide for all retail marketing operations including outlet costs. when distributed these three ways (Finding 20). This consolidated outlet revenue. MJ ERVIN & ASSOCIATES 76 . 5. a price-stable market. the Canadian retail marketing sector realized an average gross margin of 3. constitute a small portion of the retail pump price. Retail pump prices showed a corresponding seasonal pattern. Retail pump price changes showed a close relationship to underlying rack prices.

in the long term these fluctuations are likely more reflective of market restorations. this industry sector would have realized profits of unprecedented proportions. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre.6. several competitive strategies. serve as perhaps the most significant indicators of competitiveness in the downstream industry. both of which are beyond the direct influence of Canada’s oil companies. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). assuming all other costs were unchanged. have caused. Nevertheless. and has been a result of. not excessive profits. MJ ERVIN & ASSOCIATES 77 . Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Both the downward trend in margins. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Also. these findings clearly show that pump price increases are ultimately linked not to increased profits. not price. and have resulted from. most outlets used in the 19-market study represent major integrated oil companies. 7. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and in turn. crude costs. despite the predisposition of many observers to use them as such. but to increases in underlying rack prices. despite increases in tax content and crude costs (Finding 12). Thus. Also. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and the associated industry initiatives which are ongoing in nature. Declining refiner and marketing margins. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. Since 1991. Industry profitability is extremely sensitive to very small changes in pump price. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. if Canadian average pump prices were only one cent higher than they were in 1995. This trend has both resulted in. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Thus. based upon an assumed posted rack price. While these economics might appear to place this industry in a position of poor viability. and the marketing sector in particular. intense competitive pressures in the downstream industry in general. Indeed. including: • • • improving production efficiency through refinery plant rationalizations (closures).

Although some smaller markets appeared to have higher gross product margins than larger markets. MJ ERVIN & ASSOCIATES 78 . it would seem that if local government in smaller markets were interested in lowering pump prices. average pump prices were relatively high. reducing the number of outlets may also reduce the number of competitors. although this study provides comprehensive evidence of this. virtually all of the 19 study markets exhibited similar levels of competition. there are three points to consider: • In very small markets. which should. When these margins were compared to their corresponding outlet throughputs. Smaller. reduce pump prices. When plotted against the margin-volume model. In suggesting this approach however. according to the margin-volume model. The costs of most consumer goods in smaller. more isolated markets are generally higher than in larger centres. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. regardless of size. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. That such a relationship should exist was not surprising. 9. other factors exist which contribute to relatively high margins and prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites.8. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). This created some economic pressure to sell product at a higher pump price. most markets. While competitiveness in most smaller markets was shown to be as active as in larger centres. A wide range of petroleum gross product margins were evident within the 19market study group. and this study showed that gasoline prices were no exception. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1.5 million fewer litres of gasoline than a group A (major centre) station. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. Outlet throughput is a key determinant of inter-market pump price differences. which could actually inhibit competition. • • At first glance. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). isolated markets face particular challenges: although found to be highly competitive. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. had petroleum margins which were commensurate with average outlet throughput for that market. Thus. poor outlet throughputs were generally the predominant factor. the solution would be to encourage some dealers to exit the market.

is well beyond the scope of this study. and the traditional automotive service bay. in order to build upon the findings in this study towards a full understanding of the dynamics at work. the Halifax market. will likely preserve a highly competitive petroleum market. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22).• A full-serve retail gasoline outlet typically employs 3-5 staff. the degree of price competition in the retail petroleum has in effect. The federal Competition Bureau for example. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. is viewed as an agency which exists to the benefit of industry and consumer alike. and as such. Charlottetown. 10. The loss of employment represented by a station closure may be of some concern to smaller communities. are an acceptable limitation on pure competition (Finding 8). As these findings show. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. This competition then. depressed petroleum revenues below that of outlet operating costs. and likely others in Nova Scotia. Also. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. car wash. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Retail ancillary operations are a critical element of petroleum price competition. MJ ERVIN & ASSOCIATES 79 . The historical record is clear however: since deregulating pump prices. 11. and the perceived effect on their markets. many national and local environmental regulations exist for good cause. under the current PEI regulatory structure. has seen a decline in pump prices relative to other Canadian markets. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. and in turn. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). does not appear to benefit in consumer terms. is both the cause and consequence of increased activity in ancillary operations. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. as marketers find even more innovative ways to attract market share. Convenience store. characterized by narrow product margins and relatively flat pump prices.

This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. direct regulatory interventions may have an adverse effect on competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. in a simple format designed for consumers and legislators. 2. not inhibit. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. that where a healthy competitive climate exists.This study proposes rather. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. petroleum marketing competitiveness. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. possibly to the detriment of the consumer. Develop cooperative industry research into marketing sector competitiveness issues. and the nature of competitiveness influences. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. 1. Improve public understanding and awareness of competition in the petroleum marketing sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. and the converse image held in much of the public domain. margins and competitiveness factors. as it does in the Canadian petroleum marketing sector. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Public perception measurement. A regular comprehensive competitiveness evaluation. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This should be in the form of a quarterly summary of price trends and related measurements.

• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. by industry. using Canadian and foreign selected markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and issues/opportunities facing such markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. along the lines of the model used in this study. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and regulators alike. and in particular. MJ ERVIN & ASSOCIATES 81 . Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. using Canadian and foreign selected markets. consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. • • • • * * * Better understanding of this industry.

Appendices MJ ERVIN & ASSOCIATES 82 .

GST. of transporting petroleum product from the rack point to the final point of sale. service bays. safety and business issues..an organization who sells refined petroleum products to end-use consumers. Lessee . provincial pump tax. lubricants. etc. Marketer . such as a retail gasoline outlet. Ex-tax Pump Price . such as convenience goods. Grade Differential . generally expressed in cents per litre. currently established at 10¢ per litre. Major Oil Company . Distribution Costs . CPPI . etc. MJ ERVIN & ASSOCIATES 83 . Integrated Oil Company .. for example. Excise Tax . health. car wash. municipal tax levees.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry.a petroleum marketer who is not involved in the refining of petroleum products. Usually expressed on a per-unit basis.I Glossary of Terms Ancillary service . such as a major oil company or regional refiner/marketer.the difference in pump price between a premium or mid-grade of gasoline vs. Dealer . and therefore purchases its supply of petroleum product from an outside source. Independent Petroleum Marketer . an association of petroleum refiners and marketers.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.the retail price of gasoline that would be displayed if all product taxes were removed.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.a service provided in addition to the basic retail petroleum sales operation.(for the purpose of this study) the cost. which serves as the voice of the petroleum products industry in Canada on environment. the regular unleaded pump price.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.Canadian Petroleum Products Institute. The ex-tax pump price is exclusive of these taxes. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. and in some regions. independent dealers. Downstream .the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. such as lessees. diesel.a generic term referring to a retail outlet operator. There are several modes (see below) of dealer operation. Margin .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. in cents per litre. but inclusive of any corporate taxes on earnings. and included in the retail pump price. and commission dealers. These product taxes include Excise tax.

is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.the type of contractual relationship between the supplier and the dealer (outlet operator).an organization who. In the retail gasoline sector.within the context of retail gasoline marketing.the point at which title to refined product is transferred from the refiner to the supplier. Upstream . PCF . lessee. Transfer Price . and independent dealer. commission dealer.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. Although in theory the transfer price could be set at any arbitrary value. This may be at a refinery loading terminal. Rack Point .the segment of the oil industry involved in the exploration and/or production of crude oil. the supplier has initial title to the petroleum product as it leaves the rack point.the wholesale price posted at the rack point. it is usually based on the market-driven rack price. manufactures (from crude oil) a range of petroleum products suitable for consumer use.Mode . usually per month or per year. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. the raw material from which petroleum products are manufactured.Petroleum Communication Foundation. Rack Price . MJ ERVIN & ASSOCIATES 84 . Refiner . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Regional Refiner/Marketer .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. an association of upstream and downstream oil companies and related organizations.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Supplier . these can be broadly classified as company operated. Throughput .

0 32.1 1990 119.5 25.7 95.4 104.3 122. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.9 108.3 134.4 53.1 103.1 40.8 132.2 109.1 104.1 167.5 112.9 115.1 115.2 127.2 45.2 45.7 123.3 115.3 58.4 124.4 122.1 105.5 30.0 1988 108.0 135.6 92.7 22.1 151.2 142.0 111.8 108.3 52.1 120.8 104.4 29.7 118.2 30.4 152.4 136.8 135.2 112.4 120.9 1994 130.0 93.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.3 132.3 55.8 93.1 144.3 96.1 104.9 97.3 19.0 102.9 155.4 27.3 139.7 132.5 94.1 146.3 160.0 19.3 141.0 30.3 40.2 121. MJ ERVIN & ASSOCIATES 85 .6 107.2 49.4 97.2 31. Nominal (¢/litre) (2) RUL Annual Price.1 120.5 111.2 133.6 91. Nominal (¢/litre) (2) RUL Ex-tax Price.3 125.0 42.9 26.5 100.9 1995 133.2 39.5 124.8 130.8 28.0 104.9 118.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price. No.8 47.9 26.6 136.1 117.7 96.8 94.1 117.2 20.7 124.8 1987 104.6 122.3 119. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.3 1989 114.3 27.7 54.2 50.8 106.0 93.7 122.4 34.4 45.5 145.4 57.1 126.1 87.1 97.6 51.3 151.1 26.1 48. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.4 110.9 1993 130.3 1992 128.2 92.7 29.9 122. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.0 1991 126.2 99.0 97.4 104.8 95.5 126.6 133. 62-010: Consumer Prices and Price Indexes.5 120.7 30.5 115.0 115. using a weighted (by provincial gasoline demand) 10 city average.4 134.5 49.

9 6.2 13.9 25.2 26.5 23.2 41.1 7.0 28.1 53.7 25.0 33.2 14.0 20.6 5.9 7.2 22.5 31.8 14.9 26.2 13.8 15.4 33.1 18.7 29.9 31.7 33.5 22.9 22.8 21.3 13.6 7.3 57.0 22.4 26.5 7.5 14.1 22.5 26.5 Gross Marketing Margin Gross Refiner Margin 53.2 7.7 15.1 24.7 14.7 14.2 56.5 7.6 54.1 39.3 58.6 18.9 14.2 15.1 53.9 17.5 23.1 22.4 29.8 53.1 13.5 19.2 23.0 24.6 4.3 54.2 6.4 13.1 13.6 25.1 7.0 25.2 14.4 7.3 17.4 15.4 24.9 12.4 20.3 13.7 24.7 14.3 22.6 6.5 27.4 22.0 26.5 28.8 9.5 56.9 7.0 16.1 23.5 57.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.8 24.5 27.9 55.2 12.7 Downstream Margin 14.3 66.6 26.3 56.6 52.7 39.2 7.4 53.4 26.6 26.0 24.2 23.9 25.8 55.0 24.6 54.0 25.6 25.3 54.3 13.8 8.0 4.7 63.9 7.5 54.9 11.9 55.2 6.1 52.2 11.3 56.0 10.8 26.1 18.6 23.1 13.5 14.5 30.4 24.3 26.9 15.3 22.6 23.Table B: Key Price / Margin History .5 33.8 26.3 13.9 13.4 55.8 53.4 21.9 53.3 14.7 4.7 29.0 7.3 26.0 16.9 23.4 14.5 11.8 21.2 27.1 25.8 16.0 24.2 7.4 26.8 23.7 19.4 34.0 5.8 28.9 56.9 8.8 29.8 14.5 8.6 13.7 7.5 6.2 16.9 24.9 4.4 57.2 63.3 12.8 55.3 5.2 13.7 13.3 54.9 58.6 28.8 11.7 58.2 21.1 23.0 14.3 15.7 31.4 14.8 14.1 5.8 14.1 16.2 7.3 25.1 19.8 33.9 56.3 Tax Content 23.9 6.4 14.2 5.2 13.9 23.5 16.0 52.8 22.2 27.2 26.3 24.2 16.3 6.3 9.5 10.2 65.2 27.3 4.4 14.5 23.0 16.9 26.7 4.9 9.7 32.6 54.4 13.7 23.0 13.4 32.6 9.0 9.4 30.5 26.7 6.9 30.7 19.4 8.9 21.0 24.0 7.8 23.7 28.7 7.4 56.6 8.8 8.0 26.0 7.7 8.5 32.5 5.1 17.7 14.6 20.7 18.9 25.3 23.8 57.0 12.8 25.1 23.5 15.4 31.0 24.1 29.2 4.7 34.9 14.6 13.4 MJ ERVIN & ASSOCIATES 86 .1 9.7 14.9 23.5 35.0 55.5 25.7 18.4 9.9 4.3 15.0 8.5 10.7 7.1 16.8 30.2 25.2 25.4 12.0 24.2 29.9 25.0 15.7 4.0 54.9 53.4 58.1 21.2 24.9 54.1 16.7 29.9 6.7 12.3 6.6 21.0 16.8 13.4 31.3 13.1 16.6 26.2 8.6 24.0 26.3 42.9 25.

1 11.1 15.9 Downstream Margin 12.2 14.1 55.4 6.5 55.7 52.4 25.4 26.7 51.3 28.9 27.3 8.7 29.2 20.9 29.8 20.8 10.3 26.7 14.1 11.7 6.6 53.7 14.5 19.6 4.0 27.5 21.2 49.0 9.3 7.5 7.5 3.4 16.8 25.7 3.6 9.8 22.3 23.1 11.3 12.1 15.9 11.4 26.5 4.4 6.8 29.1 54.0 26.0 12.3 21.5 11.3 4.1 Gross Refiner Margin 7.7 53.0 12.3 27.1 20.5 3.5 5.2 5.1 21.9 14.2 7.1 26.7 53.5 6.0 29.0 6.5 25.4 26.3 26.1 61.8 50.4 32.2 7.5 23.0 28.8 28.7 5.6 12.1 6.7 26.7 23.2 12.2 23.3 26.0 14.2 15.9 14.9 23.5 13.0 28.5 21.9 49.0 57.0 5.6 11.6 21.1 6.7 16.7 25.3 9.7 24.6 15.3 53.7 13.9 58.5 21.5 13.3 26.3 28.9 12.4 5.8 49.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.8 6.9 19.6 53.3 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .9 29.0 5.0 26.9 5.4 24.3 58.1 24.8 4.5 14.9 3.1 11.2 4.1 51.0 24.1 6.1 6.7 53.3 21.5 6.0 9.9 28.2 11.6 23.0 52.7 26.6 16.1 14.6 4.2 25.9 6.5 15.4 26.2 26.3 4.3 7.3 13.0 14.5 7.3 4.1 Tax Content 26.4 15.6 3.9 12.7 18.2 7.2 28.1 16.5 6.8 28.5 53.1 57.4 21.3 26.3 54.7 5.5 17.2 9.7 12.2 25.0 28.0 28.6 19.3 6.5 2.4 25.4 21.7 24.8 52.5 54.7 25.2 54.4 51.9 27.7 15.4 6.6 10.3 9.4 4.9 26.0 25.8 23.1 3.5 5.1 15.6 20.0 11.2 26.8 27.3 26.8 23.7 7.2 27.6 17.4 28.6 20.5 28.3 25.7 7.7 3.4 11.6 5.0 53.1 26.0 25.2 Gross Marketing Margin 4.2 4.6 10.3 9.5 9.0 6.3 26.5 20.6 15.1 10.1 26.6 27.3 26.3 55.5 11.0 6.4 6.2 14.5 19.1 14.9 4.9 4.9 9.2 14.1 51.7 6.8 17.7 8.2 20.0 54.4 7.2 7.1 14.0 28.7 13.2 26.9 49.4 13.9 17.

141.130 3.628 3.682 3.7 24.840.844.133 3. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.714.246 2.779 2.970 3.894.5 19.322 2.622.802 2.651 2.354.673 2.251.366 2.6 26.422.5 31.191 2.5 28.7 24.932 2.089.767.206.269 2.254 2.4 22.427.120.199 2.051 3.4 24.263.968 3.613 3.075.286.313 2.490 3.733 2.2 20.654.287 2.294.843.370 2.8 22.025.501.970.3 23.476.295.193 3.970.801.9 19.889 3.499 2.2 22.630.045 2.510 3.369 2.2 27.626.443 2.516.796.182 3.479 2.4 24.7 29.827 3.019.627 2.011 2.7 29.083.2 23.729.322 3.095.141 3.710.381 2.621.379.869 2.181.9 21.5 23.9 30.279 2.209.666.8 29.9 22.403 2.9 17.799.693 3.3 23.180.3 24.8 28.839 2.580 3.255 3.2 27.1 16.285 2.475 2.0 24.9 23.880 Canadian Retail Gasoline Sales (M3) 2.604 2.995.810.620 3.070 3.2 21.6 24.973.677 3.5 27.415 2.056 3.8 26.782 3.176 2.1 23.565.709 2.081.930 3.508.455.4 29.9 23.636.015 3.572 2.709 2.325 2.291.044 2.7 31.047 3.7 28.641.338 3.933 3.122 2.9 31.642.179 3.633 2.369.429 2.3 26.101 2.6 21.930.456 2.967 2.781.587.1 21.615 2.131.030.502 2.744.389.823.748 2.202 3.735.748.321.864 2.4 21.439.281 2.938.070.739.8 27.7 29.311 3.4 21.002.532.085.979 2.1 22.218 3.952.682.232 3.876.636.5 27.822.671.521 2.176 3.725.201.853 3.430.8 23.558.600.130 3.841 2.813 2.934.897 2.966.833 2.900.8 23.297 2.592 2.151.765 3.114 3.873.437.188 3.625 2.886 3.976.9 26.345.180 3.287.331 2.458.619 2.566.262.299 2.7 18.801.883.8 33.256 2.5 22.192.646 2.437.804 3.450 2.281.035 2.4 32.3 22.798.637 3.732.2 26.029 2.300.299.4 25.818.8 MJ ERVIN & ASSOCIATES 88 .047 2.703 2. Demand.871 2.785.5 32.979 3.958.373.773.767.2 24.9 29.667 2.429 2.564 2.026 2.633.7 26.941 2.122.2 27.830.9 26.242 2.5 30.235 3.688.0 20.067.301.020 2.893.254.544 3.859 2.884 2.164.132.324 2.904.142.6 23.960.558.3 Canada Avg RUL Rack Price (¢/l) 35.8 21.1 23.743 2.720 3.268 2.095 2.518.161.283.Table C: Canadian Supply.8 30.2 27.218.716.250.931 3.473.2 23.254.108.485 2.301.890.202.037 2.000 3.2 29.969 2.647.346.599 2.045 2.7 34.6 28.609.301 2.509 3.887.316.220.335 2.669.644 3.045.039.168 2.853 2.589 3.441.0 28.412 2.315 2.878 2.874 3.4 31.326.661 Canada Avg ex tax RUL pump price (¢/l) 39.771 3.101.270 3.411.027 2.684 2.152 2.457 2.329 3.462.298 2.865.073 2.461 3.853.837.322 2.160 3.140.672.480.897 3.831.477.469 4.2 26.287 2.378.022.409.498.3 22.245.416 2.935 3.377.897.808.003.180 2.687.141.612 3.1 29.361. Inventory.112 2.9 23.804 2.333.102.775.097 2.323 3.998.113.193 3.1 23.7 21.661 Canadian Domestic Gasoline Sales (M3) 2.5 25.752 2.

919 2.961.593.667 Canadian Domestic Gasoline Sales (M3) 3.796.773.606.521 2.4 26.648 3.442 2.324.928 3.4 20.539.714 2.8 20.376.649.620.614.703 3.5 25.671.1 24.8 25.830 3.480 2.797.155 2.315.148.077.881.936 3.170 3.205 2.198.386 3.566 3.840 2.382.5 21.363.806.130 3.717.415 2.9 29.4 26.864 2.055 2.9 27.184.198 2.005 2.469.6 20.2 25.324 2.037 3.344 3.6 20.4 25.8 28.994 3.519.904.692.675 2.638 2.141 2.2 26.607.785.597 2.074.179.294 3.006 3.336.250.149.7 19.182.669 2.204.214 2.264 2.555.537. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .112 3.198.048.656 3.390.2 25.999 3.7 22.658.7 Canada Avg RUL Rack Price (¢/l) 20.414 3.370.601 3.679.863.346 2.123.0 26.997 2.222 2.0 25.965.467 2.165.649.264 2.9 22.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.0 24.930.1 21.426.097.753 3.386 3.986.317 2.8 21.5 source: Statistics Canada (production.244 3.7 21.977.984 3.338 2.871 3.516 3.906.068.170 Canadian Retail Gasoline Sales (M3) 2.8 24.505 2.320 3. demand.195.660 3.644 3.791 3.5 21.261.799 2.0 25.483.889.825.970.857.219 Canada Avg ex tax RUL pump price (¢/l) 27.0 26.617 2.082.940 2.

9 55.3 52.7 White Rock Calgary 45.2 65.5 59.1 52.5 51.3 49.3 61.9 53.7 45.4 57.6 47.2 65.0 55.9 54.4 52.5 53.7 65.5 57.9 56.3 51.9 64.4 50.6 58.9 47.9 54.9 MJ ERVIN & ASSOCIATES 90 .2 56.4 65.5 60.3 54.5 57.5 57.0 61.1 41.8 57.4 55.4 56.7 65.8 52.9 54.4 61.0 61.4 58.1 49.1 53.4 59.7 53.Table D: Pump Price History .8 56.3 52.5 58.8 44.4 54.4 61.9 52.2 48.7 53.5 60.8 59.9 54.9 53.2 54.9 53.5 57.9 58.9 48.5 59.6 56.3 52.9 57.8 56.4 54.7 50.0 61.5 57.5 51.9 44.5 51.1 55.8 49.8 47.9 56.0 54.3 62.9 55.5 57.4 61.9 53.6 58.5 56.5 58.1 50.6 50.9 52.5 55.5 56.8 47.2 62.7 48.1 60.6 55.8 53.1 43.6 49.2 51.9 53.9 53.5 Vancouver 53.6 44.6 47.0 50.1 49.7 44.6 46.3 48.0 58.0 Sioux Lookout 62.5 58.0 39.7 51.8 48.9 56.4 52.7 49.9 54.3 42.5 57.7 65.2 50.0 62.6 53.9 61.9 56.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 52.4 53.5 58.2 62.9 56.8 57.7 62.4 56.2 50.7 54.6 46.4 52.5 59.2 62.5 58.9 61.8 48.4 55.2 62.8 54.9 47.5 60.4 46.5 51.5 59.8 52.4 52.0 62.8 51.7 54.5 47.6 54.5 53.9 45.7 65.4 47.8 64.9 55.4 Winnipeg 49.5 57.4 63.5 54.4 46.2 43.5 56.9 56.9 47.7 45.7 57.7 51.8 56.9 53.4 48.4 55.9 64.9 53.8 50.9 61.5 59.9 56.9 61.4 58.9 52.8 53.6 51.0 52.9 54.9 56.9 56.7 63.2 61.5 59.5 58.9 49.0 59.3 55.5 54.2 54.2 46.7 51.9 47.7 57.5 61.9 49.5 50.9 58.1 59.8 48.5 57.8 59.7 62.5 56.1 44.2 51.4 56.5 58.5 53.0 46.4 53.2 55.0 61.5 46.5 58.8 50.3 55.9 58.2 50.9 62.5 62.9 52.9 56.9 51.5 51.9 51.9 54.8 45.0 57.8 56.4 53.6 48.5 57.9 51.1 50.4 56.9 53.1 53.7 53.8 56.9 61.8 41.1 44.9 50.5 57.7 52.4 55.0 62.2 62.6 52.9 49.8 52.9 57.5 49.0 52.8 48.1 52.6 59.2 63.7 50.9 44.5 59.5 52.3 49.4 54.0 61.9 64.5 57.7 52.6 48.4 52.4 56.5 59.5 60.8 56.9 56.9 52.4 56.8 53.5 45.5 47.4 46.3 52.1 55.7 46.5 58.9 58.2 46.5 57.4 57.9 63.9 53.2 62.5 58.3 50.9 46.9 52.9 51.2 62.2 62.0 61.6 54.3 54.5 55.2 54.3 52.6 62.9 64.1 49.9 59.3 56.7 54.9 54.9 62.5 47.0 44.5 45.6 48.2 47.5 60.2 58.1 55.4 55.5 60.9 52.4 49.2 46.3 50.5 58.4 55.0 61.9 61.9 55.2 Nanton Peace River Regina 49.9 59.6 47.8 52.0 48.5 59.8 55.7 65.5 58.9 53.0 59.6 50.3 48.2 59.9 58.2 62.1 56.8 52.5 56.7 48.2 57.8 53.9 64.8 Thompson 59.6 53.6 55.5 61.2 51.3 59.

7 51.7 57.3 53.9 64.9 49.0 59.8 47.7 54.9 57.0 52.1 61.4 54.9 50.7 47.3 53.9 64.0 60.8 56.3 54.8 49.5 54.0 60.1 49.2 61.0 52.2 57.4 49.0 59.1 51.1 51.9 58.5 54.6 56.4 52.8 54.2 55.9 53.1 53.2 51.0 56.6 54.1 55.7 59.2 54.7 57.9 61.6 54.6 55.3 61.1 55.6 50.2 56.4 51.7 56.1 53.9 55.3 52.4 52.5 52.2 49.1 58.5 56.6 58.1 48.2 60.0 55.6 56.3 49.2 58.5 53.6 54.6 52.3 56.3 55.9 60.6 50.1 61.2 57.4 53.3 52.0 56.5 57.5 54.5 52.4 54.1 58.9 54.0 54.0 57.0 55.2 56.9 55.6 52.6 52.8 50.1 53.3 54.8 59.5 55.2 53.3 52.4 54.3 56.8 50.3 58.9 53.7 57.9 57.9 61.4 57.1 57.2 57.1 55.0 53.7 52.1 57.9 55.1 59.6 52.0 59.0 53.4 57.1 54.6 53.8 54.0 57.5 60.1 57.9 61.7 56.6 50.5 56.7 54.6 52.0 52.5 Ottawa 58.9 55.2 56.2 59.2 57.5 56.3 62.5 56.0 61.1 53.6 60.5 64.3 54.2 56.1 58.0 52.3 54.8 63.5 54.0 54.2 52.1 56.2 54.2 52.7 54.5 60.2 56.5 55.9 55.8 57.6 53.5 61.4 58.5 51.6 52.1 54.7 60.2 55.5 56.3 53.5 61.8 57.5 55.2 59.1 Toronto 52.6 54.7 51.8 60.8 61.4 60.2 57.5 54.6 55.9 53.2 49.7 46.3 56.8 55.1 54.5 54.4 53.9 53.0 51.7 49.7 64.3 59.0 52.3 55.6 53.6 54.8 55.6 54.1 52.6 55.5 53.4 58.8 52.7 57.3 54.6 51.8 53.3 49.9 60.3 56.9 55.5 59.3 55.5 64.4 54.6 49.9 51.4 54.5 58.9 56.2 49.0 55.4 51.4 58.2 50.6 61.3 55.1 52.7 54.8 49.6 61.5 57.1 61.8 54.7 50.5 51.2 61.1 54.7 56.1 60.1 53.6 52.7 51.2 51.6 57.5 57.5 59.5 48.8 55.2 55.6 58.5 63.7 56.5 53.3 54.9 53.5 53.6 55.3 52.2 58.6 56.4 50.8 56.7 56.5 52.9 52.2 57.9 57.5 63.0 48.8 Halifax Charlottetown 60.6 58.7 58.3 54.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.6 51.2 51.9 57.1 51.4 51.6 58.1 54.3 55.0 57.3 57.2 54.9 56.9 55.7 51.0 55.0 47.9 61.5 61.4 45.3 54.5 67.9 61.7 48.5 57.9 55.8 57.6 55.3 51.9 55.7 52.5 54.8 55.3 53.0 60.2 61.7 52.8 52.6 49.2 53.0 50.3 55.2 54.9 49.0 47.9 58.3 56.9 56.3 60.7 54.7 57.2 55.6 63.0 55.6 56.1 56.4 57.4 54.9 49.0 52.4 54.7 55.2 57.0 49.4 53.1 55.2 57.1 60.0 58.4 57.2 56.1 59.6 55.2 Montreal 63.2 56.0 55.5 52.2 56.2 53.5 59.0 53.8 55.6 59.6 Canada Avg 55.7 53.8 60.9 49.6 59.4 58.6 63.7 48.7 53.5 63.5 51.6 51.Table D: Pump Price History .3 59.8 50.9 54.8 53.1 56.4 54.0 54.8 54.9 54.3 59.1 55.2 52.8 51.0 51.2 60.7 44.2 54.5 51.6 58.4 55.4 58.6 55.9 62.1 52.0 60.7 54.3 53.6 53.1 54.5 MJ ERVIN & ASSOCIATES 91 .7 56.8 53.4 57.9 60.3 54.6 59.2 55.6 63.2 58.0 50.8 61.0 50.8 55.2 55.1 55.9 63.0 57.2 49.4 53.4 55.4 58.2 57.2 57.3 59.0 48.5 57.1 58.0 61.7 58.4 57.7 59.0 56.0 54.2 Chicoutimi Gaspé Saint John 60.6 54.9 55.9 56.9 64.8 55.8 55.

8 23.7 Sep-95 30.5 Feb-92 28.4 29.5 21.4 22.4 24.9 24.9 Aug-93 30.4 27.4 Mar-92 28.5 Jul-95 30.5 27.6 28.1 Apr-94 29.8 Jan-94 25.7 27.7 Sep-94 32.6 29.4 31.4 25.5 26.6 29.0 22.4 31.6 Aug-95 30.4 MJ ERVIN & ASSOCIATES 92 .3 28.9 Jul-93 28.0 Oct-93 28.6 29.7 25.7 28.1 22.9 24.7 28.9 30.0 29.7 26.7 24.2 28.9 28.3 May-94 28.0 26.2 24.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.3 26.2 26.8 29.3 Jan-93 30.4 30.9 25.5 28.3 26.7 Aug-92 24.0 24.9 29.2 28.3 27.6 23.6 30.2 24.1 30.7 28.9 26.4 Dec-92 31.7 30.5 23.4 28.1 25.4 31.2 24.0 26.2 Dec-94 26.8 Toronto extax 26.8 26.4 22.6 25.0 May-92 28.7 29.5 29.4 27.9 25.4 22.4 23.2 26.3 29.4 Jun-95 30.5 27.4 29.4 30.9 25.3 28.8 26.2 27.9 24.1 24.9 25.6 28.9 26.4 27.7 Jan-92 31.1 22.7 30.4 21.3 26.1 26.8 27.0 21.3 31.1 25.4 25.5 29.3 28.4 29.0 24.0 23.1 19.9 Oct-94 32.8 24.2 29.5 24.7 Jan-95 27.8 27.6 27.9 27.8 28.1 27.3 27.8 25.4 29.7 26.5 29.2 24.2 Jun-94 31.2 25.4 23.8 29.4 20.3 23.0 23.4 26.3 33.9 28.7 29.8 28.3 30.4 20.5 21.0 23.4 31.0 32.3 30.3 30.5 23.4 29.9 27.3 30.8 24.4 29.6 24.9 30.6 25.6 23.7 26.6 26.6 30.9 23.2 25.5 24.8 28.4 24.1 31.4 28.0 24.1 24.9 29.3 29.6 May-95 29.6 23.0 25.9 25.8 25.3 29.3 Dec-95 Edmonton Regina extax extax 27.7 Winnipeg extax 27.4 31.7 31.3 29.5 Sep-92 29.5 Oct-92 30.0 25.1 Feb-93 29.4 28.2 Apr-93 28.9 28.8 24.8 21.4 27.4 27.3 29.1 25.8 27.0 Apr-92 30.0 23.7 29.9 27.3 24.3 26.5 27.3 Feb-95 26.9 31.0 27.3 28.2 28.2 26.1 24.3 28.2 Nov-93 27.8 Dec-93 26.3 29.7 27.9 27.3 32.4 29.8 Feb-94 24.2 26.6 26.6 Sep-93 28.0 31.5 25.6 27.8 22.4 31.4 31.5 27.0 Jun-93 26.9 21.1 26.6 Jun-92 32.8 29.0 28.5 29.5 Aug-94 28.1 Apr-95 30.6 26.7 Mar-94 28.8 25.3 29.8 31.0 May-93 29.3 24.6 26.6 29.9 20.1 20.2 29.4 25.4 30.0 25.1 28.3 21.5 Oct-95 30.6 22.3 29.7 30.8 26.1 28.0 26.6 27.6 26.9 26.3 24.2 23.7 28.9 23.3 23.8 27.6 26.1 23.5 Nov-95 30.9 24.9 26.5 27.1 Mar-95 29.6 26.7 28.9 24.0 23.4 23.3 26.7 24.5 29.3 Jul-92 31.2 32.0 31.8 27.9 30.8 26.1 25.3 29.6 22.2 Nov-92 31.5 24.8 24.3 29.6 21.6 24.5 Jul-94 29.2 27.6 27.7 30.8 29.4 20.6 26.1 30.6 Mar-93 28.4 25.5 26.9 28.6 23.0 27.2 Nov-94 29.7 30.7 29.8 27.1 27.Table E: Ex-tax Pump Price History .9 21.4 25.9 29.1 31.7 26.2 22.2 28.7 28.4 30.6 30.

7 27.9 32.6 29.8 33.7 26.4 27.9 31.0 30.4 25.4 32.6 32.2 25.3 28.9 30.3 27.1 24.7 Quebec extax 32.6 34.1 29.6 32.1 Montreal extax 31.0 31.2 26.6 28.3 31.2 36.4 34.7 34.4 33.8 32.9 30.6 36.0 33.9 30.7 30.4 21.5 25.4 31.2 27.9 32.3 25.2 27.4 33.1 29.4 32.0 33.5 36.9 27.9 31.7 24.4 31.9 30.1 30.7 28.5 25.0 25.0 33.4 28.2 28.6 26.7 28.6 28.1 22.0 28.2 25.8 32.6 28.8 29.2 29.8 27.9 33.3 29.7 25.4 33.6 Charlottetown extax 36.0 27.5 24.2 30.9 27.8 25.4 25.4 26.7 27.7 24.8 27.0 28.4 24.0 36.6 24.0 34.9 29.2 25.3 31.2 24.8 30.3 26.3 25.5 30.8 23.9 26.5 30.7 27.3 34.8 26.6 32.3 22.7 23.3 29.4 26.0 29.7 28.7 26.4 33.5 27.1 30.0 29.9 28.7 33.8 25.0 25.3 28.1 31.2 25.5 27.4 33.4 32.9 33.9 24.5 28.0 30.6 26.6 32.1 34.5 25.1 28.2 21.1 25.5 25.9 29.3 28.0 23.6 36.2 22.9 27.5 26.2 26.5 24.2 28.2 27.8 23.7 28.1 26.6 27.7 32.2 27.3 28.1 32.1 29.9 35.0 33.9 32.4 36.7 27.5 33.0 28.2 27.8 26.8 25.5 28.0 26.5 33.3 25.7 26.7 22.0 25.0 28.8 29.6 23.7 28.8 28.3 26.8 28.2 26.8 28.7 26.6 34.9 32.4 25.7 32.Table E: Ex-tax Pump Price History .2 32.3 26.5 25.2 30.7 32.9 23.7 29.2 33.9 29.8 30.0 36.0 33.8 33.5 28.7 MJ ERVIN & ASSOCIATES 93 .2 26.8 23.2 32.2 27.7 24.8 27.2 32.9 26.1 24.0 29.3 25.6 23.1 32.7 23.8 28.4 26.1 32.3 27.8 29.1 23.9 28.2 34.6 26.7 30.7 34.8 26.1 24.8 28.6 28.2 24.7 23.2 23.2 22.2 22.3 34.8 29.5 31.7 26.5 34.9 27.4 25.7 26.6 33.6 31.8 23.2 28.5 31.2 22.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.3 34.3 29.1 24.3 24.2 26.6 31.6 25.3 23.0 26.1 26.9 27.3 29.5 28.5 32.2 36.3 31.5 27.3 30.1 34.0 32.9 30.1 28.8 32.7 29.3 33.8 29.2 33.9 29.8 28.0 26.4 22.0 28.9 29.5 26.6 29.5 33.8 32.9 29.4 31.3 35.2 27.5 30.5 27.5 25.1 30.8 26.3 31.6 27.8 27.6 26.8 36.9 26.8 24.3 29.6 22.2 27.2 27.6 27.4 28.8 Canada Avg extax 29.6 33.1 34.2 30.5 29.0 34.6 32.1 32.2 Saint John Halifax extax extax 34.4 24.6 25.0 32.3 31.3 28.6 28.0 23.7 24.9 37.0 34.7 24.8 26.9 29.8 30.4 36.8 25.

8 19.6 20.6 23.4 22.4 19.8 20.2 16.8 24.7 21.3 23.8 20.9 24.6 23.2 19.7 20.9 20.2 18.4 22.6 20.0 23.4 23.4 20.1 15.0 22.1 19.4 21.8 21.4 22.8 27.1 19.2 18.5 21.8 18.5 20.7 22.2 16.4 23.0 19.3 24.0 19.7 21.6 19.9 21.7 17.6 23.2 21.7 21.1 20.5 21.5 27.4 24.5 22.4 21.5 22.9 21.7 17.4 21.8 23.2 17.7 21.0 21.1 23.6 23.3 26.9 21.2 21.1 22.5 17.2 21.8 20.4 23.1 24.5 22.3 22.0 22.4 21.2 18.8 21.1 21.5 24.1 22.7 17.1 20.3 23.3 19.2 23.6 20.0 21.0 22.5 20.3 24.0 22.4 20.4 22.1 20.8 20.3 23.1 21.3 21.0 23.3 18.5 21.0 23.7 21.1 21.6 20.8 25.8 21.4 15.7 22.8 19.1 15.1 20.1 23.1 22.3 17.2 19.8 23.3 20.9 22.8 22.9 21.5 19.9 22.9 18.5 24.5 18.6 25.4 21.4 22.5 23.4 18.4 22.0 21.0 21.2 21.7 MJ ERVIN & ASSOCIATES 94 .6 20.8 18.3 22.9 22.3 19.7 16.3 23.7 22.Table F: Rack Prices .6 19.2 20.8 23.2 21.8 23.1 20.1 20.8 19.7 18.6 20.9 21.4 21.9 22.9 20.4 21.6 19.5 22.3 20.0 22.4 22.7 23.9 22.2 23.5 20.9 23.8 21.7 19.8 22.1 18.8 22.0 21.8 22.7 22.0 23.9 18.4 22.2 20.3 22.2 Quebec city Montreal rack Toronto rack rack 19.8 Ottawa rack Thunder Bay rack 20.7 22.6 25.2 21.0 24.9 23.6 21.5 17.8 23.8 23.5 18.9 18.3 21.2 29.5 23.6 23.5 21.4 21.0 19.6 23.8 19.2 21.6 19.4 22.8 21.5 23.8 20.4 21.6 22.3 19.5 21.2 22.4 21.0 21.6 18.7 22.1 21.1 20.0 20.9 19.1 21.5 22.4 22.2 18.4 22.3 20.0 23.3 18.3 17.8 21.1 22.4 20.9 22.4 17.5 22.0 20.7 23.6 25.7 22.5 20.2 18.5 21.6 21.7 18.1 22.3 22.1 19.0 23.9 17.6 19.1 20.8 23.0 21.9 22.2 21.8 20.3 23.7 19.2 20.1 23.3 18.4 20.5 21.4 20.2 20.9 21.3 23.1 21.2 22.2 20.1 16.3 21.3 23.2 20.7 20.5 24.4 21.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.1 21.3 19.7 21.3 21.7 20.6 20.6 19.2 16.9 25.4 21.4 23.2 22.1 22.8 18.1 Halifax rack 20.0 22.5 21.8 18.5 26.3 21.3 20.7 21.7 22.7 22.2 23.2 23.5 19.3 17.8 22.5 17.9 18.4 21.9 20.1 21.0 23.0 23.2 19.1 22.

9 22.5 22.4 23.8 23.3 18.8 22.2 24.7 24.4 20.8 20.2 22.0 18.0 24.5 23.6 23.9 22.2 19.4 24.7 24.5 21.2 18.7 20.7 21.7 21.3 23.4 22.8 18.1 22.6 21.9 22.4 19.2 20.1 22.8 24.5 Canada avg rack 22.7 22.8 20.7 22.8 24.3 17.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.5 21.0 17.8 Vancouver Victoria rack rack 24.5 17.2 21.9 23.7 21.0 20.0 17.9 19.1 23.4 19.4 24.9 22.4 21.9 18.6 21.3 17.0 18.1 20.9 19.0 20.1 23.3 23.4 23.0 25.3 21.6 22.7 21.8 23.1 21.6 21.1 23.6 24.0 22.5 MJ ERVIN & ASSOCIATES 95 .9 22.6 25.1 16.8 23.7 22.7 22.6 23.5 22.5 21.8 20.5 21.0 21.3 23.5 24.1 20.2 22.0 22.2 24.8 20.0 20.7 22.9 20.3 21.1 21.1 19.2 22.6 19.Table F: Rack Prices .3 24.7 23.8 20.5 21.9 24.3 24.7 21.1 19.8 21.2 22.2 21.9 20.9 21.5 22.5 24.6 22.1 21.5 21.9 17.0 22.5 22.7 17.7 25.8 21.5 21.0 20.4 22.6 25.6 24.9 21.1 24.0 23.1 22.4 24.0 23.7 21.3 19.8 22.4 22.9 19.1 22.0 23.7 24.7 21.3 20.2 Edmonton Rack 23.9 18.7 19.3 22.1 21.0 22.7 22.5 20.1 21.9 19.1 16.5 21.4 20.6 20.1 25.2 21.0 22.8 23.6 23.7 21.6 23.9 19.2 23.5 19.6 19.9 21.1 18.7 23.3 23.6 22.2 23.2 24.3 17.1 21.2 22.6 20.4 21.5 24.9 22.3 22.6 23.5 19.4 23.1 20.9 22.2 23.2 24.5 23.1 17.7 23.5 23.0 21.6 23.1 18.6 21.7 22.9 22.9 23.0 23.3 21.2 22.9 23.2 23.9 21.1 21.7 25.0 22.1 23.8 24.0 22.5 23.6 17.5 21.0 24.4 21.4 18.9 20.5 22.3 19.5 24.5 23.3 24.1 23.6 21.9 23.4 24.5 20.1 23.9 23.2 24.5 23.9 21.7 22.4 23.7 22.5 23.6 22.6 21.2 22.2 19.8 22.2 20.4 21.6 20.3 24.1 25.4 21.5 18.0 21.4 21.8 25.6 23.5 19.6 21.8 22.8 21.9 23.3 23.9 21.8 22.2 20.9 21.1 23.7 18.6 21.9 21.5 18.9 22.0 24.3 20.3 20.0 24.5 19.4 21.7 21.7 21.3 21.2 21.9 24.3 22.8 22.1 23.0 23.1 21.6 25.2 22.7 17.9 21.7 21.1 25.1 23.0 22.9 24.2 23.5 21.7 21.6 21.2 20.3 23.5 20.8 21.1 23.3 20.7 22.1 22.3 22.2 20.7 23.4 22.6 21.2 23.2 21.9 19.1 22.6 23.4 25.4 21.4 22.5 20.3 23.0 21.0 21.5 22.7 23.6 20.8 19.6 17.9 19.

70 55.529 123.621 102.832 91.859 240.73 65.90 67.796 529.83 68. and All Study Markets are weighted (by market population) averages.249.972 429.438 591.97 51.153 316.145.554 2.16 59.89 60.058 2.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.971 473.86 56.220 389.000 217.10 53.549 111.30 68.65 54.10 52.702 333.628 702.30 57.790 185.42 53.10 59.686 273.40 61.25 57.89 61.87 61.85 48.60 60.614 3.34 63.97 63.196 669.11 58.796 2.92 51.50 55.66 50.26 44.80 64.460 833.377 30.334.296 179.72 58.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.810.20 59.890 2.101 256.55 58.985 636.234 799.53 61.23 63.597 2.712 1.246 2.983 1.30 52.643 184.830 2.687 1.00 67.018 2.60 50.Table G: Study Market Data .250 748.837 329.669 203.268 478.70 49.475 1.000 63.48 56.922 103.141.50 56.420.516.60 70.933 25.060.620.30 66.00 48.72 63.245 351.90 62.150 48.20 54.74 57.014 3.241 451.00 57.40 63.20 61.056.20 60.412 722.935 758.704.636.332 101.030.173 568.000 1.38 56.40 58.811 120.557.78 67.018.894 1.834 71.000 1.400 142.89 65.00 62.03 58.850 126.009 54.895 600.093.60 49.174.745.30 54.770 2.905 183.23 53.414 450.72 74.625 64.102 98.980 120.10 63.35 73.749 243.22 59.858.238 2.26 49.508 2.26 63.02 51.298 576.166 102.19 52.370 41.40 59.00 66. MJ ERVIN & ASSOCIATES 96 .94 55.204. Urban.903 33.98 59.214 248.483 2.543 2.13 58.24 61.671 399.93 63.698 Note: Regional.192 2.678.30 54.300 578.17 Diesel 64.119 632.113 2.07 61.997 397.448.18 51.90 63.50 56.00 57.28 65.19 49.88 54.53 48.483 63.45 63.702.85 54.749 91.32 51.194.211 15.30 63.120 570.052 84.897 350.20 58.88 64.45 53.40 54.36 54.500 378.949 1.513 19.945.101 447.

23 23.41 27.07 24.88 20.38 24.17 20.96 24.63 21.82 28.13 23.06 28.90 27.59 28.59 28.51 20.73 32.55 28.89 25.34 26.81 21.95 25.32 21.11 26.03 20.47 20.56 22.21 27.20 20.Rack Price.39 22.38 24.50 25.45 24.63 26.01 22.45 29.89 28.35 25.33 21.42 24.76 24.36 24.64 28.43 20.33 21.16 21.03 21.55 28.85 28.48 25.81 25.16 22.15 29.08 25.42 27.59 22.33 22.83 22.97 25.88 22.33 21.98 25.92 30.50 20.18 28.65 27.78 Product taxes Midgrade Regular 26.21 27.33 22.26 28.40 27.15 24.95 22.37 27.75 22.49 31.75 27.88 22.90 26.09 27.94 23.69 27.08 23.32 33. Urban.83 25.43 20.92 22.65 21.88 28.63 25. MJ ERVIN & ASSOCIATES 97 .23 25.25 31.25 24.36 26.45 24.15 27.76 25.63 28.84 28.93 27.73 26.33 21.43 21.45 28.97 23.45 25.47 27.49 21.81 27.45 23.07 24.39 21.51 31.89 29.99 26. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.45 29.83 24.16 29.34 25.88 28.45 20.18 25.63 24.74 21.88 20.27 29.43 28.07 26.01 28.92 21.59 24.09 24.96 24. and All Study Markets are weighted (by market population) averages.81 28.23 26.33 22.57 29.97 22.45 20.39 22.65 26.92 20.95 Premium 26.07 24.45 20.59 28.99 28.87 26.59 22.54 28.93 23.83 23.31 22.98 28.47 28.25 27.53 23.26 27.45 20.51 25.93 23.83 24.58 25.42 24.Table H: Study Market Data .69 23.39 Note: Regional.03 24.68 Diesel 36.04 26.42 25.49 25.57 22.89 26.28 23.82 21. Tax (by Grade) Rack Pt.40 25.83 24.25 28.34 20.04 24.84 28.49 21.51 25.02 23.39 21.41 22.30 29.63 20.20 27.15 20.33 21.95 22.96 22.45 22.23 24.28 22.27 20.07 26.43 21.91 21.33 27.

35 60.63 60.08 0.00 0.31 23.06 28.73 2.73 1.96 3. Urban.45 6.38 22.52 5.96 25.58 66.90 23.Table J: Study Market Data . Average Deviation is the average deviation of the market values from their mean (average) value.12 23.23 38.07 0.17 26.48 7.41 7.42 2.99 2.24 7.62 56.81 28.18 21.08 17.73 22.38 28.50 3.75 23.01 0.36 20.38 2.27 6.56 4.19 5.31 28.76 5.24 7.30 12.60 14.88 5.64 2.41 29.82 32.60 23.98 31.52 30.83 21.89 0.34 0. Variance uses the formula [n∑x2 .26 3.34 1.07 0.82 3.97 0.38 0.64 3.05 6.06 0.89 21.27 11.91 2.95 6.30 5.03 7.31 34.13 11.47 58.04 28.033 0.71 33.02 3.50 10.84 28.25 1.35 28.93 56. Costs.20 14.02 0.47 0. MJ ERVIN & ASSOCIATES 98 .53 21.35 27.63 58.28 1.77 30.72 26.98 0.53 6.64 3.56 24.98 1.22 5.77 37.78 2.95 21.59 4.29 24.66 28.22 1.57 12.44 33.(∑x)2 ]/n2.85 26.35 58.33 .94 22.16 54.68 7.04 23.04 22.45 1.91 0.29 7.20 5.86 49.79 0.85 21.43 23.90 59.81 26.86 28.00 4.83 12.39 56.26 5.Blended Prices.10 3.93 22.26 27.60 7.21 24.89 28.83 27.33 9.91 29.31 0.07 30.82 95 Retail Gross Product Margin 6.27 60.28 1.02 13.88 31. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.17 1.85 24.41 12.32 31.21 8.36 0.44 25.37 26.02 22.49 2.18 7.11 26.79 33.51 11.12 6.70 22.50 58.28 27.92 22.10 6.01 31.83 1.08 3.54 50.16 20.96 27.17 11.13 28.96 28.73 10.68 2.27 62.00 22.49 57.44 56.50 0.98 0.94 17.80 9.84 5.80 1.14 7.00 58.85 11.11 31.91 22.68 7.14 60.94 Note: Regional.58 1.99 0.38 7.03 28.64 1.23 7.15 66.24 23.83 36.06 5.04 0.17 9.21 8.13 0.18 55.08 55.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.28 56.43 0.53 22.75 28.77 5. and All Study Markets are weighted (by market population) averages.29 8.16 3.22 14.

209 $ 82.246 $ 118.772.542.098 $ (320.632 $ 256.800 $ 225.719 3. Urban.794 3.623 2.948 3.241) $ (227.272 $ 210. Revenue.000 2.520 5.224 $ 189.866) $ (244.638 2.067 $ 92.000 $ 156.557) $ 102.572) $ (286.646) $ (98.658.626 $ 81.648 3.779 $ 121.000) $ (241. Outlet Costs.526 $ 207.394.900 $ 179.081 $ 222.478 4.707 $ 260.244 95 net retail Ancillary Revenue petroleum revenue $ 208.913 $ 139.688 $ 85.014.279 $ 154.604.289 981. these averages are based on all applicable study markets.295 $ 174.120 $ 54.871) $ (128. and All Study Markets are weighted (by market population) averages.544 $ 175.966 3.467 $ 96.143) $ (249.640 4.129 $ 97.694 3. outlet costs.010 1.098.023 $ (15.Table K: Study Market Data .068 3.852) $ 119.805.564 $ 252.102 $ 223.716 Note: Regional.766) $ (274.263 $ 60.144 2.011.095.550 694.032 $ 77.066 3.265.302 $ 69.542 $ 222.780 $ 85.502 $ (80) $ 60. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.750 $ 271.013 $ 227.429 $ 238.900 2.071. but for ancillary revenue.004.332) $ (238.890.375) $ (49.875 $ 255.550 $ 177. For 95 net retail petroleum revenue.223.885.058.956) $ 200.272 $ 118.157.630 3.208) $ (226.855 $ 278.677 $ 180.250. MJ ERVIN & ASSOCIATES 99 .197.074 $ 131.217 2.209 $ 26.367) $ (164.Sales.510 $ 60.995 $ 234.622 $ 174.135 $ 199.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.746 $ (374.089.934 3.465.911) $ (166.247 4.837 $ 56.856 3.481 $ 96.993 $ 113.117 $ 207.827. and consolidated outlet income these averages are based only on those markets with available data.

970 330.04 15 4.38 0.41 0.775 678.21 0.47 14 3.91 17 4.42 5 14.88 12 7.08 3.Demographic Profiles Population pop’n 299 .890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.98 7.275.40 9 4.542.870 120.23 8 31.400 74. of Brands No.157 2.08 4 2.01 7 2.975 2.775.06 16 4.145 81.54 6 2.06 1 5.827 3.96 5.315 710.22 0.000 pop’n No.23 6 7.76 18 5.00 11.745 16.17 19 9.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.41 1.014 5. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.80 10 4.60 11 7.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.265 2.85 15 11.310 1.28 17.60 3.475 3.550 1.845 15.50 3 10.50 8.004 3.30 0. MJ ERVIN & ASSOCIATES 100 .89 2 4.73 14.29 8 7.20 0.08 16 3.585 6.223 3. of Outlets No.29 1.089 3.098 4.Table L: Study Market Data .20 17 14.48 7 7.22 3.394 2.98 6.68 4 7.91 12.36 5. inverse ranking is used (lowest value = 1).88 11 8.605 16.45 0.33 0.058 1.06 5.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.13 2 11.465 694 3.24 0. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.53 10 6.40 1 3.43 12.73 5 10.790 1.30 1.55 19 11. N refers to study sample size (total = 481).03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.97 8. rank* 3.715 14.095 3.250 981 2.89 7.10 3.50 9.658 3.180 616.604 3.95 3 9.79 6.52 13 5.47 7.675 179.90 13 4.27 0.84 12 5.27 1.51 9 11.071 2.02 0.45 14.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.

Principal Address: #400. Contact: Michael J. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. 119 . K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . and in doing so. They work with major oil companies in benchmarking performance in the retail. The SCF is the basis for this study. accessible through a public fax-back dial-in system. health. Petroleum Products Address: 235 Queen Street. safety and business issues.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Senior Advisor. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. aviation and lubricants marketing channels. Ottawa ON. Contact: Maureen Monaghan Address: 580 Booth Street. Ottawa ON. Contact: Cindy Christopher. a series of studies whose goal is to strengthen Canada’s competitiveness. bulk.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. and provide background resources to industry public affairs managers and the media. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). Ottawa ON. Ervin. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Vice President Public Affairs Address: 275 Slater Street. cardlock.14th Street NW Calgary AB. Contact: Brendan Hawley. They maintain a large database of historical prices at most major centres. generate jobs and growth.

Contact: Len Bradley. no 45-004) is a useful source of supply and demand volume data. 311 . Contact: Robert Curran. Managing Editor Address: Suite 2450. Contact: Gerard O’Connor. Executive Director Address: 214. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. 101 . Supervisor. Calgary AB.6th Avenue. Octane is published quarterly. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.Octane Magazine Octane is Canada’s refining and marketing trade journal. Its monthly publication “Refined Petroleum Products” (cat. Ottawa ON.ab. SW Calgary. Energy Section Address: Statistics Canada. and is a useful “window” on this industry.6th Ave.

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